there is a qualitative difference, since the rbi has some flexibility now in respect of the extent of its support to government borrowing programme. with increasing market orientation of the financial structure and international capital flows, monetary policy responds to developments on an ongoing basis. in an administered interest rate and exchange rate regime, the quantity variables dominated and transmitted monetary policy impulses. however, external and financial sector reforms have since enhanced the sensitiveness of quantity variables to their market determined price, i. e. interest rate and exchange rate. it must be recognised that in recent times, the emphasis has also been on closely monitoring different indicators apart from relying on the intermediate target. for aiming at the intermediate target ( viz., broad money ) the underlying operating target is reserve money, particularly the banks ’ reserves, while the supplementary operating target is the short - term interest rate proxied generally by the overnight call money rates. operating procedures and instruments the reforms in the monetary and financial sectors have enabled the rbi to expand the array of instruments at its command. as already mentioned, the operational target of monetary policy continues to be banks ’ reserves which is controlled by changes in reserve requirements effected mainly through the instruments of cash reserve ratio ( crr ). however, the use of crr as an instrument of monetary control is sought to be de - emphasised and the liquidity management in the system is increasingly undertaken through open market operations ( omo ), both outright and repos. in view of the overall downward movement in crr, except on occasions of exchange rate volatility, the excess liquidity in the system is mopped up by outright sales of government securities by rbi. over the reform period, the market absorption of government securities was facilitated by reforms in the government securities market, which ensured market related rates of interest and thus some of the basic conditions were provided for developing a secondary market. the short - term liquidity management is also aided by conduct of repos on a regular basis. usually, the rbi conducts repos for a maturity of up to 14 days, which is the cycle for reserve requirements. recently, the rbi has been conducting 3 - 4 day fixed rate repos to absorb very short - term liquidity and to even out money market rates, especially overnight call money rates. the repo rates and the amounts tendered in the repo auctions, apart from reflecting liquidity conditions, provide a floor for the overnight call money rates. in the event of tight liquidity conditions,

mr reddy discusses monetary policy in india speech by y. v. reddy, deputy governor of the reserve bank of india, at the fourth securities industry summit, in mumbai, india on 26 may 1999. chairman and friends, i thank the organisers for inviting me to deliver the inaugural address at the fourth annual securities industry summit. although the discussions in this summit will specifically veer around the securities market, monetary policy strongly influences the working of the financial markets. as a central banker, i will, therefore, speak on monetary policy making, which i trust will provide some perspectives to the deliberations at the summit. objectives in india, monetary policy has always emphasised the objectives of price stability and growth. what this, in effect, has meant in practical policy setting is, formulating a balance between the two objectives depending on the evolving situation but within the broad context of keeping the inflation rate within a reasonable bound. apart from these two important goals, there has been a conscious attempt on the part of the reserve bank in recent years to maintain orderly conditions in the foreign exchange market, and to curb destabilising and self - fulfilling speculative activities. this has assumed strategic importance for the sustainability of the external sector in the face of growing cross border capital flows into the economy. with the increasing order of domestic and international financial integration, exchange rate expectations do impact on the domestic stance of monetary policy and hence the significance of inflation. in the transitional phase, however, given the exchange market imperfections, the exchange rate objective may occasionally predominate due to emphasis on avoidance of undue volatility. in fact, sometimes, as was the case recently, it could be the most dominant reason for short - term monetary policy adjustments. in a broader framework, the objectives of monetary policy in india continue to be price stability and growth. these are pursued inter alia through ensuring credit availability, with stability in the external value of the rupee as well as overall financial stability, all being reflective of pursuit of the overall objectives. the relative emphasis among the objectives is governed by the prevailing circumstances. targets the conduct of monetary policy in india has traditionally proceeded with the help of an intermediate target, which the central bank could influence directly and which bears a reasonably close relationship with the ultimate objectives. the particular mode of central bank intervention is the operating instrument. macro - economic variables, which post useful information about the objectives of monetary policy, although they may not in themselves be amenable to central bank targeting, are ‘