deepak mohanty : implementation of monetary policy in india speech by mr deepak mohanty, executive director of the reserve bank of india, at the bankers club, bhubaneswar, 15 march 2010. * * * the assistance provided by shri bhupal singh and shri binod b. bhoi is acknowledged. i thank the bankers club, bhubaneswar for providing me this opportunity to speak to you this evening. how does the reserve bank of india implement monetary policy? this is the question i would like to address. but before doing that i will briefly touch upon the objectives and framework of monetary policy, as they have evolved, to set the context for discussion on operational aspects of monetary policy. i will conclude with a discussion on the process of monetary policy formulation and communication. objectives and framework in india, the objectives of monetary policy evolved as maintaining price stability and ensuring adequate flow of credit to the productive sectors of the economy. with progressive liberalisation and increasing globalisation of the economy, maintaining orderly conditions in the financial markets emerged as an additional policy objective. thus, monetary policy in india endeavours to maintain a judicious balance between price stability, economic growth and financial stability. the monetary policy framework in india from the mid - 1980s till 1997 – 98 can be characterized as a monetary targeting framework on the lines recommended by chakravarty committee ( 1985 ). because of the reasonable stability of the money demand function, the annual growth in broad money ( m3 ) was used as an intermediate target of monetary policy to achieve the final objectives. monetary management involved working out m3 growth consistent with projected gdp growth and a tolerable level of inflation. in practice, however, the monetary targeting approach was used in a flexible manner with “ feedback ” from the developments in the real sector. for example, if the real gdp growth was expected to be higher, m3 projection was revised upwards. in the 1990s, the increasing market orientation of the financial system and greater capital inflows imparted instability to the money demand function. consequently, there was a shift to multiple indicators approach in the late 1990s. under this approach, interest rates or rates of return in different markets along with movements in currency, credit, fiscal position, trade, capital flows, inflation rate, exchange rate, refinancing and transactions in foreign exchange – available on a high frequency basis – are juxtaposed with output data for drawing policy perspectives. the multiple indicators approach continued to evolve and was

horizontal management and more market orientation. the process leading to monetary policy actions entails a wide range of inputs involving the internal staff, market participants, academics, financial market experts and the bank ’ s board ( chart 3 ). chart 3 processes of monetary policy formulation several new institutional arrangements and work processes have been put in place to meet the needs of policy making in a complex and fast changing economic environment. at the apex of the policy process is the governor, assisted closely by deputy governors and guided by deliberations of the board of directors. a committee of the board meets every week to review the monetary, economic and financial conditions and renders advice on policy. there are several other standing and ad hoc committees or groups which play a critical role with regard to policy advice. an interdepartmental financial markets committee focuses on day - to - day market operations and tactics while periodic monetary policy strategy meetings analyse strategies on an ongoing basis. information dissemination and policy communication it is generally believed that greater information dissemination and policy communication could lead to better policy outcome. it is, however, not clear as to what extent the communication would result in shaping and managing expectations. for example, the us federal reserve, since 1994, appears to have been providing forward guidance, while the ecb appears to be in the mould of keeping the markets informed rather than guiding it. in india, a middle path is followed by sharing of both information and analysis. the stance of monetary policy and the rationale are communicated to the public in a variety of ways, the governor ’ s most important being the quarterly monetary policy statements. further, the policy measures are analysed in various statutory and non - statutory publications, speeches and press releases. information on areas relating to the economy, banking and financial sector is released with stringent standards of quality and timeliness. dissemination of information takes place through several channels ( chart 4 ). the reserve bank has also developed a real time database on the indian economy, which is available to the public through its website. chart 4 information dissemination and policy communication conclusions with the changing framework of monetary policy in indian from monetary targeting to an augmented multiple indictors approach, the operating targets and processes have also undergone a change. there has been a shift from quantitative intermediate targets to interest rates, as the development of financial markets enabled transmission of policy signals through the interest rate channel. at the same time, availability of multiple instruments such as crr, omo including laf and mss has provided