Transmission mechanisms for monetary policies in India

Abstract

Fiscal dominance has been largely overcome. Frameworks are now more credible and central banks have become more flexible in their operations. The interest rate channels of monetary policy have become much stronger. However, the emergence of a truly global market economy and the associated changes in monetary policy regimes worldwide has sharpened the debate about how monetary policy affects the economy. Substantial changes over the past decade have doubtless altered transmission channels. Most, if not all, countries now have an independent monetary policy regime, with strong emphasis on inflation control. The financial markets in many countries are much more developed; the structure of the economy has undergone significant changes, and there has been a steady increase in trade and financial openness of emerging market economies. However, the nature and effectiveness of the transmission mechanism for monetary policy varies according to the size, structure and openness of the economy in question .Indian markets, though having come a long way, are still not as developed as some of the more advanced countries. With the world economy in a mess and the government and the RBI launching expansionary policies to keep the economy on track (such as the recent decrease in the repo and reverse repo rate), the true affect, feasibility, effectiveness and the timelines of the policies will make an interesting research.