to improve the implementation and transmission of monetary policy. first, explicit announcement of an operating target makes market participants clear about the desired policy impact. second, a single policy rate removes the confusion arising out of policy rate alternating between the repo and the reverse repo rates. it also improves the accuracy of signalling monetary policy stance. third, the institution of msf provides a safety valve against unanticipated liquidity shocks. fourth, a fixed interest rate corridor set by msf rate and reverse repo rate, by reducing uncertainty and avoiding communication difficulties associated with a variable corridor, will help keep the overnight average call money rate close to the repo rate. improvement in monetary policy transmission as the new operating procedure was implemented just six months ago, it may be too early to draw conclusions regarding its efficacy. however, the experience so far suggests that overnight interest rate has been more stable since its implementation ( chart 4 ). bis central bankers ’ speeches the new operating framework presupposes the dominance of the interest rate channel of monetary transmission, which is found to be more effective under deficit liquidity condition. since its implementation, we have been able to maintain the systemic liquidity in deficit mode. consequently, the transmission of monetary policy in terms of movement in call money market interest rate has shown improvement ( chart 5 ). it has also been observed that money market interest rates are better aligned after the implementation of new operating framework ( chart 6 ). further, better transmission to debt market segment is also evident from closer alignment between rates on debt market instruments and call rate ( chart 7 ). bis central bankers ’ speeches the transmission to the credit market is much more complex and occurs through the cost channel. banks respond to policy changes by altering deposit rates depending on liquidity conditions and credit demand. as the cost of deposits rises alongside money market rates, lending rates respond to policy rate changes with a lag ( chart 8 ). policy formulation processes given the monetary policy framework and the corresponding operating procedure, there is also a process in policy formulation. the process of monetary policy formulation in india had traditionally been largely internal with only the end - product of actions being made public. the process has, over time, become more consultative and participative with an external 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 reserve bank board ( chart 9 ). bis central bankers ’ speeches within the reserve bank,

, monetary policy focused more on short - term demand management while inflation was firmly under control, particularly in the advanced economies. it was felt that fine - tuning of monetary policy on the basis of indicators, such as output gaps and measures of core inflation, led central banks towards excessive ‘ short - termism ’. this in turn contributed to build up of risks. thus, policies focused on shortterm objectives may not deliver desired economic outcomes in medium to long term. second, the experience of recent crisis has changed the perception as to how central banks should go about achieving their macroeconomic stabilisation objectives. it has become clear that mandate of monetary policy should encompass macro - financial stability and not just price stability. this has drawn attention to the impracticability of tinbergen ’ s rule of assigning one instrument for one objective. in practice, interest rate changes affect financial stability. similarly, macroprudential tools impact credit growth and hence monetary transmission. recognition of interaction between interest rate and macroprudential tools becomes critical for the appropriate design of monetary policy. this underscores the importance of close monitoring and analysis of financial system developments so that possible risks can be better integrated into the formulation and implementation of monetary policy. third, inadequacy of monetary policy instruments in central banks ’ operational frameworks was also evident during the crisis. as was seen during initial phase of the crisis, monetary policy framed and implemented via instrument of policy interest rate remained ineffective. consequently, central banks had to resort to a number other unconventional quantity - based measures to ease financial conditions. thus, there is a need to broaden the toolkit of monetary instruments. fourth, though financial frictions play an important role in business cycles, they were not explicit part of the models used for policy analysis by central banks ( mishkin, 2011 ). 3 in most crises, including the recent one, it has been seen that shocks to financial system accentuate information asymmetry and affect policy transmission. therefore, not only must financial frictions be properly understood, but they should also be built into macro - econometric models that central banks use for forecasting and policy formulation. fifth, after the crisis, it has been increasingly felt that central banks could better discharge lender of last resort ( lolr ) function if they are also vested with micro - prudential regulation and supervision of banks. it could reinforce macroprudential action by eliciting regulatory and supervisory instruments to dampen pro -