The word 'monetary' means 'Of or relating to money' or 'Of or relating to a nation's currency or coin'. Students of Economics would have studied 'money and banking' in detail, while learning the part of economics styled 'Monetary Theory & Practice'. The Central Bank of a country is vested with the responsibility of the issue and supply of money, which by statute is termed legal tender within that country and accepted as a means of settlement of all claims. Money thus serves as a medium of exchange of goods and services. More than that money is also a store of value and itself deemed as an asset. Money Invested grows, while money borrowed involves cost-incurring. This is defined by the concept 'Time Value of Money'.

The total quantum of money at the hands of the public at any given time represents the aggregate purchasing power of the market. It counteracts with the availability of aggregate supply of goods and services at that time with the market and resultantly influences of level of prices to prevail. Excess money supply also called 'excess liquidity' in the system leads to inflationary pressures and increase of prices at the short-term or the immediate effect. In the next phase it gives a fillip to increase in production to meet the increasing demand for goods, and creates more employment. It is therefore felt that moderate inflation identified as 'threshold inflation' (or growth maximising inflation rate) is desirable.

Monetary policy refers to the policy being pursued by the Central bank in relation to money supply with the public. Through regulatory process & market operations the Central Bank aims both at price stability and growth of the economy. Different facets of the policy as being pursued in India by RBI are looked into in this project, as also its historical growth over the decades. All the articles chosen in the different modules are extracts from contributions by the top executives of RBI, made at recent years at different places and covers all concepts of the monetary policy as being followed in India.

The projects covers six modules listed as under:

1. Module: 1 - Introduction, Basic Concepts

   1. Introduction; Basic Concepts Explained

   2. Definition of Important Monetary Policy Terms

2. Module: 2 - Growth, Inflation and The Conduct of Monetary Policy

   Reforms during the 1990s were supported by a shift in the monetary policy framework in which monetary policy has been conducted. The Reserve Bank had moved in the 1980s from direct quantitative controls through credit budgeting to a formal monetary targeting framework. Monetary targeting was conducted in an environment where interest rates were substantially regulated. The system, however, was not efficient in resource allocation. It supported a large draft on household savings by the Government. The reforms that began in 1991 were supported by a change in operating procedures for the conduct of monetary policy. From a pure monetary targeting framework, a change to a multiple indicator approach was effected with a greater reliance on interest rates. The module assesses this shift in the context of monetary transmission channels. Among other changes, market borrowings of the Government began to be conducted at market determined interest rates. This was aimed at introducing a sense of fiscal discipline and freeing larger resources for private investment. It also enabled the conduct of open market operations, enabling monetary authorities to move to full-fledged use of indirect instruments of monetary policy. Focus has since shifted to operating on the short-end of the money market through Liquidity Adjustment Facility operations in addition to using the conventional tools like the Bank Rate and the CRR. In the milieu of the changed framework, the Chapter analyses the inflation record during the reform period and explains the monetary and non-monetary factors that have helped lower inflation rate since the end of 1995. Empirical evidence on transmission of the impact of monetary policy actions to output and inflation is also presented in some detail.

   1. Monetary Policy & Growth

   2. Transmission of Monetary Policy to Growth

   3. The Credit Channel

   4. The Constraints on Growth-Oriented Monetary Policy

3. Module: 3 - The Transmission Mechanism of Monetary Policy in Emerging Market Economies (BIS Policy Paper - Year 1998)

   What are or What Should be the Objectives of a Prudent Monetary Policy In an Emerging Economy
   [Source: BIS Policy Papers - BIS Website]

   Globally economists do not agree about how monetary policy affects the economy. Different observers weigh in different ways the various specific channels through which monetary policy works. Views diverge even about the monetary transmission process in individual industrialised nations, the subject of decades of theoretical and empirical research; the process in developing countries is still more uncertain.

   Yet an understanding of the transmission process is essential to the appropriate design and implementation of monetary policy. Because changes in the structure of the economy - including changes in balance-sheet positions, in financial sector technology and institutions, or in expectations concerning future policy - tend to alter the economic effects of a given monetary policy measure, central banks need to be alert to the impact of structural change. They need to be able to continuously reinterpret the channels of transmission of monetary policy.

   These important questions were discussed by a small group of senior central bankers at the BIS in January 1997. Two days of very lively debate revealed not only much common ground but also important differences. Much depended on the specific context in which monetary policy was framed: the historical record of inflation; the nature and depth of the financial system; the international financial background; and so on. BIS has published on its website under the folder "Policy Papers" a series of articles representing the contribution of representatves of individual countries during the discussions. The first paper provides an overview of some of these issues and tries, where possible, to delineate the differences between countries. Extracts from the paper giving an overview of the issues is reproduced in the the second module

   1. The Transmission Mechanism of Monetary Policy in Emerging Market Economies

   2. Part - 2

   3. Part - 3

   4. Part - 4

   5. Part - 5

4. Module: 4 - Parameters of Monetary Policy in India

   "The parameters of Monetary Policy" is an extract of the Lecture by Dr Y V Reddy, Deputy Governor of the Reserve Bank of India, at the 88th Annual Conference of The Indian Econometric Society at Madras School of Economics, Chennai, 15 January 2002. It states the policy guidelines pursued in India with regards to transmission mechanism of Monetary Policy.

   In recent times considerations of financial stability have assumed increasing importance in monetary policy. The most serious economic downturns in the recent years appear to be generally associated with financial instability. The important questions for policy in the context of financial instability are the origin and the transmission of different types of shocks in the financial system, the nature and the extent of feedback in policy and the effectiveness of different policy instruments. As a result the central bank of a country could no longer ideally view a single overwhelming objective of price stability. Central banks are now responsible for a number of objectives besides price stability, such as currency stability, financial stability, growth in employment and income. This objective defines the policy parameters in the new globlised environment of financial markets.

   The first part of the lecture, gives a general overview of the parameters of monetary policy. In the second part, the international experience in this regard with a particular focus on changing contours is dealt with. The third part contains a description of evolving parameters of monetary policy in India beginning with a brief description of the process of policy making. The fourth part would highlight the impressive gains made during the reform period so far, in regard to statutory preemptions, deregulation of interest rates, financial and external stability despite the persisting fiscal deficits and large market borrowing programmes. The concluding part sets forth immediate tasks before the Reserve Bank of India in its conduct of monetary policy.

   1. Parameters of Monetary Policy in India Part: 1

   2. Monetary Policy in India - Policy Making Process

   3. Tasks before RBI

5. Module: 5 - BIS Policy Paper on Monetary Policy Operating Procedures in Emerging Market Economies

   In the 1999 the Bank of International Settlement (BIS) conducted another discussion group by a team of Central Bankers on the subject titled above. Commenting on an overview of the duifferent presentations made in the Policy Group the website of BIS observes as under:-

   "This work provides an overview of monetary policy operating procedures in emerging market economies. Most of the discussion reflects the situation in mid-1998. The emphasis is on general principles although in practice country-specific factors condition actual procedures. Yet there has been a certain convergence in monetary policy instruments and procedures in recent years, not only in industrial countries but also in most emerging market economies. Major forces for change have been the rapid development and deepening of a variety of financial markets and instruments, the diversification of financial institutions and the globalisation of intermediation."

   In this group/policy discussions India was represented by Dr. Y.V.Reddy, Dy. Governor, RBI, at that time. He submitted an informative paper tracing the Development of Monetary Policy Initiatives by RBI over the years. The contents of his paper is covered under Module - 4

   1. Development of Monetary Policy Initiatives by RBI over the years - Part: 1

   2. Part: 2

   3. Part: 3

6. Module: 6 -Report of The Advisory Group on Transparency in Monetary and Financial Policiy

   The Report prepared by the Advisory Group on ‘Transparency in Monetary and Financial Policies’ chaired by Shri M. Narasimham, Chairman, Administrative Staff College of India with Shri S.S Tarapore, former Deputy Governor, Reserve Bank of India as member was submitted to the Standing Committee in September 2000. Good transparency practices are important for strengthening institutional governance and increasing the efficiency of markets. By setting out clear mandates and responsibilities and encouraging open processes for the formulation, conduct and implementation of operational procedures, transparency also serves to increase the effectiveness, credibility and accountability of monetary and financial policies. The Advisory Group has reviewed, in detail, the IMF codes on ‘Good Practices on Transparency in Monetary and Financial Policies’ and recommended a set of actions duly taking into account the Indian context vis-à-vis the best practices on the basis of a survey of experience of select countries. In particular, explaining the overall concept and the context of transparency, the Report makes a critical evaluation of India’s compliance with standards and codes and suggests measures to improve transparency in the formulation and implementation of monetary and other financial policies.

   The Advisory Group on Transparency in Monetary and Financial Policies was set up by Atanding Committee constituted by RBI towards implementation of International Codes on Financial stability , with the following terms of reference :

   • To study present status of applicability and relevance and compliance in India of the relevant standards and codes.

   • To review the feasibility of compliance and the time frame within which this can be achieved given the prevailing legal and institutional practices in India.

   • To compare the levels of adherence in India, vis-a-vis, industrialised countries and also emerging economies particularly to understand India’s position and prioritise actions on some of the more important codes and standards.

   • To chalk out a course of action for achieving the best practices.

   The module covers the following articles

   1. Concept of Transparency

   2. Transparency of monetary and financial policies in India
      Criticl Evaluation of India's compliance with International Codes

   3. Process of Monetary Policy Formulation

   4. Transparency in Policy Formulation

   5. Summary and Recommendations