ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

A+| A| A-

RBI’s Interest Rate Policy and Durable Liquidity Question

The Reserve Bank of India should take into consideration longer term liquidity management for smooth monetary transmission. It must clearly define “durable liquidity” in the form of some quantitative variable and set its desired path for one year or so. This will anchor expectations on future interest rate and liquidity premium, and certainly improve the link between the interest rates in various terms to maturity. Moreover, the desired target for durable liquidity can also serve to improve overall monetary policy effectiveness.

The Reserve Bank of Indias (RBI) monetary policy has emerged as the most critical policy tool in the post-reform period in overall macroeconomic management, particularly pursuing the objective of growth with price stability. The conduct of monetary policy, of course, has evolved over time, with several turns and twists, both with regard to the policy framework and the operating procedure.

The RBI adopted monetary targeting with feedback as the monetary policy framework in 1985 guided by the recommendations of the Chakravarty Committee (RBI 1985). The context in which such a framework was adopted needs to be understood. Given the high level of inflation in the 1970s and 1980s, the need for price stability became dominant. The high inflation was fuelled by excessive money supply which was the outcome of large RBI credit to government. With an administered interest structure, money supply became the target variable for achieving price stability. With the development of a broad-based financial market after the freeing of the interest rate and exchange rate in the early 1990s, it became possible to shift focus from exclusive reliance on monetary aggregates for conduct of monetary policy to a broad set of indicators, including interest rates, prices, bank credit growth, foreign exchange rate, balance of payments indicators, etc. Thus, the RBI adopted multiple indicators approach in 199899. However, it posed all the issues connected with multiple objectives. Subsequently, guided by the recommendations of Patel Committee (RBI 2014), inflation targeting became the latest monetary policy framework since 201415. This has brought clarity to the objectives of monetary policy.

Dear Reader,

To continue reading, become a subscriber.

Explore our attractive subscription offers.

Click here


To gain instant access to this article (download).

INR 59

(Readers in India)

$ 6

(Readers outside India)

Published On : 20th Jan, 2024

Support Us

Your Support will ensure EPW’s financial viability and sustainability.

The EPW produces independent and public-spirited scholarship and analyses of contemporary affairs every week. EPW is one of the few publications that keep alive the spirit of intellectual inquiry in the Indian media.

Often described as a publication with a “social conscience,” EPW has never shied away from taking strong editorial positions. Our publication is free from political pressure, or commercial interests. Our editorial independence is our pride.

We rely on your support to continue the endeavour of highlighting the challenges faced by the disadvantaged, writings from the margins, and scholarship on the most pertinent issues that concern contemporary Indian society.

Every contribution is valuable for our future.