mr. rangarajan examines the objectives of monetary policy and price stability in relation to the economy of india address by the governor of the reserve bank of india, mr. c. rangarajan, at the second conference of the econometric society ’ s regional chapter for india and south asia in delhi on 28 / 12 / 96. 1. it gives me indeed very great pleasure to be in your midst this morning. it is indeed very gratifying to note that the second conference of the econometric society ’ s regional chapter for india and south east asia is being held in delhi. 2. econometrics as a discipline has come a long way. enriched by the developments both in mathematical economics and statistical methods, econometrics has today become an indispensable tool to all practitioners. without a numerical evaluation of economic magnitudes, economic theory would have been of little use in economic policy. the original motto of cowles foundation was ‘ science is measurement ’. it used to be said that in economics the tendency of theory to lag behind observations seemed to be endemic. we have definitely moved away from that situation. while alternative theories to explain a set of phenomena are not necessarily a weakness and may even be regarded as a sign of vitality, the continued co - existence of alternative theories over a substantial period of time without being able to discriminate among them can result in the loss of credibility in the discipline itself. this in part is the present status of economics. the future scope of econometrics is thus immense. 3. i would like to take this opportunity given to me this morning to raise one issue in monetary policy that still remains contentious despite overwhelming agreement among policy makers in industrially advanced countries. the issue relates to the objective of monetary policy. the question is : what should be the objective or objectives of monetary policy and whether in the indian context, maintenance of price stability should be the dominant objective of monetary policy? 4. the issue of objective has become important because of the need to provide clear guidance to monetary policy makers. indeed this aspect has assumed added significance in the context of the increasing stress on autonomy of central banks. while autonomy has to go with accountability, accountability itself requires a clear enunciation of goals. 5. monetary policy has now moved to the centre stage of economic policy - making the world over. in the 1930s and in the first two decades after the second world war, monetary policy was relegated to the background. the ascend

reserve requirement. second, there is a single policy rate. third, the objective of the policy rate is to target a short - term money market rate. fourth, there is a corridor around the policy rate charted by interest rates for standing facilities which aim to contain the volatility in the target interest rate. fifth, the interest rates on standing facilities are determined with reference to the policy rate. what is the reserve bank of india ’ s operating framework? the monetary policy framework and the associated operating procedure of monetary policy in india have also evolved over time. on 3rd may 2011, the reserve bank in its annual bis central bankers ’ speeches monetary policy statement announced a revised monetary policy operating procedure based on the recommendations of a committee constituted for the purpose. 5 before i delve into the current operating procedure, let me give you a snapshot of the evolution of our monetary policy operations since the inception of the reserve bank of india in 1935. first, in the formative years during 1935 – 1950, the focus of monetary policy was to regulate the supply of and demand for credit in the economy through the bank rate, reserve requirements and omo. second, during the development phase during 1951 – 1970, the need to support plan financing through accommodation of government deficit financing by the rbi began to significantly influence the conduct of monetary policy. this led to introduction of several quantitative control measures to contain the consequent inflationary pressures while ensuring credit to preferred sectors. these measures included selective credit control, credit authorisation scheme ( cas ) and “ social control ” measures to enhance the flow of credit to priority sectors. the bank rate was raised more frequently during this period. third, during 1971 – 90, the focus of monetary policy was on credit planning. however, the dominance of fiscal policy over monetary policy accentuated and continued through the 1980s. to raise resources for the government from banks, the statutory liquidity ratio ( slr ) was progressively increased from the statutory minimum of 25 per cent of banks ’ net demand and time liabilities ( ndtl ) in 1970 to 38. 5 per cent by 1990. and to neutralise the inflationary impact of deficit financing, the cash reserve ratio ( crr ) was gradually raised from its statutory minimum of 3 per cent to 15 per cent of ndtl during the period. fourth, the 1980s saw the adoption of monetary targeting framework based on the recommendations of chakravarty committee ( 1985 ). under this framework, reserve money was used as operating target and broad