Rakesh Mohan and Michael Patra* 9.1 INTRODUCTION Key to the efficient conduct of monetary policy is the condition that it must exert a systematic influence on the economy in a forward-looking sense. A priori economic theory backed by some empirical evidence has identified the main channels through which monetary policy impacts upon its final targets, namely output, employment and inflation. Broadly, the vehicles of monetary transmission can be classified into financial market prices (for example, interest rates, exchange rates, yields, asset prices, equity prices) or financial market quantities (money supply, credit aggregates, supply of government bonds and foreign denominated assets). It is recognized that, whereas these channels are not mutually exclusive, the relative importance of each channel may differ from one economy to another depending on a number of factors including the underlying structural characteristics, the state of development of financial markets, the instruments available to monetary policy, the fiscal stance and the degree of openness. This chapter focuses on the Indian experience with monetary policy transmission. Section 9.2 sets out an overview of the monetary policy regime in India, covering objectives, framework, operating procedures and instruments, and the evolution of financial markets. Section 9.3 discusses the various monetary policy transmission channels in India – interest rates, bank lending, debt market, exchange rate and communication and expectations. Section 9.4 makes an assessment of monetary transmission in terms of the actual outcomes in the context of the ultimate objectives of price stability and growth. Section 9.5 concludes by providing some suggestions on...
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