Review of monetary policy of RBI from 1991 and focus on its future strategies

Abstract

The objective of the study is to understand the monetary policy of the RBI and its evolution since liberalization in 1991. The idea is to look at the conflicting objectives confronting the monetary policy of any country and how RBI has been instrumental in managing these since 1991. We also try to understand the various instruments used by RBI in conducting its monetary policy in accordance with its set objectives. There has been a talk recently that with the recent surge in the level of capital inflows to India and its subsequent pressure on the rupee to appreciate, RBI would find it difficult to work within the market and constraints set by the government policies and goals.1 The process of sterilization that has been used effectively in the past might not produce the same result now with either the government or the banking system paying the price for resisting rupee appreciation. We try to analyze the measures taken by RBI in this regard and given the mammoth challenges that confront RBI in line with its objective of 9-10% growth rate in the 11th five year plan, how instrumental RBI could be with its Monetary Policy. In addition, we try to evaluate the probable future strategies of RBI and the various alternatives it can resort to in order to resolve the current problem of rising capital inflows and appreciating rupee. This report deals with the central bank, government policy, monetary policy, capital inflows, exchange rate stabilization, inflation and their interdependence and application to the Indian context; thus we feel it might provide useful insights for public policy making especially in India. Moreover, this report might be beneficial for finance managers of companies whose performance is dependent on changes in macroeconomic variables and it can be of help in devising the future strategies of the company, especially to develop expectations regarding exchange rate.