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"Impact of RBI's Monetary Policy for the Last Two Decades and Medium Term Strategy for Managing Foreign Exchange Reserves." --Macro Economics
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The Monetary Policy, traditionally announced twice a year, regulates the supply of money and the cost and availability of credit in the economy. It deals with both the lending and borrowing rates of interest for commercial banks. The Monetary Policy aims to maintain price stability, full employment and economic growth. The Reserve Bank of India is responsible for formulating and implementing Monetary Policy. It can increase or decrease the supply of currency as well as interest rate, carry out open market operations, control credit and vary the reserve requirements.
The objective of price stability has, however, gained further importance following the opening-up of the economy and the deregulation of financial markets in India in recent times. There are four main 'channels' which the RBI looks at:
·Quantum channel: money supply and credit (affects real output and price level through changes in reserves money, money supply and credit aggregates). ·Interest rate channel.
·Exchange rate channel (linked to the currency).
Pre-Reform (Prior 1992)
In the pre-reform era, the financial market in India was highly segmented and regulated. The money market lacked depth, with only the overnight interbank market in place. The interest rates in the government...