Page 263 - DECO502_INDIAN_ECONOMIC_POLICY_ENGLISH

Unit 20: Indian Financial System: Money Market and Monetary Policy

stability which provides the appropriate environment under which growth can occur and social Notes
justice can be ensured”. “The case for price stability as the dominant objective of monetary policy
began to assume importance in the early 1990s”.... In essence [however], monetary policy aims to
maintain a judicious balance between price stability and economic growth”.
However, macroeconomic conditions of the country—especially the financial structure of the country,
demand for and supply of money and the nature of monetary management needs of the country—
have been changing over time. Therefore, the objectives of monetary policy and instruments of
monetary control and management issues have also been changing, though price stabilization remained
the central theme of India’s monetary policy. In simple words, with changing economic conditions of
the country, the RBI has been changing monetary policy objectives, and it has been using a combination
of monetary policy instruments to achieve its targets. We discuss here briefly the objectives of monetary
policy and instruments adopted by the RBI to achieve its objective.
Monetary Measures
The RBI has been using various monetary measures from time to time including some non-traditional
measures for price stabilization and other monetary policy objectives. We give here a brief description
of the measures adopted by the RBI, and also their effectiveness.
1. Bank Rate : The bank rate has been one of the important instruments used by the RBI to control
inflation, whenever required. As mentioned above, the bank rate remained unchanged at 3
percent during 1935-1950. Since 1951, however, bank rate has been frequently changed — mostly
increased — as shown in Table 2. As can be seen in Table 2, the RBI was using bank rate
infrequently as a weapon of monetary control till mid-1990s with the purpose of mitigating
mounting inflationary pressure in the country. After mid-1990s, however, inflation rate declined
with rise in the growth rate of the economy, due mainly to economic reforms. As a result, the
RBI started reducing bank rate from the year 1997 which continued till May 2008. However, the
RBI started enhancing the bank rate and raised it to 7.5 percent in July 2008 due to rate of
inflation crossing double digit. However, due to fall in the inflation rate in late 2008, the bank
rate was cut down to 6 percent in January 2009. This rate is likely to be maintained in fiscal year
2008-09.
Table 2 : Changes in Bank Rate in India

Year Bank Rate (%) Month and Year Bank Rate (%)
1935 3.0 April 1997 11.0
1951 3.5 June 1997 10.0
1957 4.0 October 1997 9.0
1963 4.5 October 1999 8.0
1964 5.0 April 2000 7.0
1965 6.0 October 2001 6.5
1975 9.0 April 2003 6.0
1981 10.0 April 2004 6.0
1991 11.0 March 2005 6.0
1992 12.0 June 2008 7.0
July 2008 7.5
August 2008 6.0
January 2009 6.0

Source : CMIE, Basic Statistics Relating to the Indian Economy — August 1993 and various issues of
Economic Surveys, MQF, GOI.

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