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Monetory Policy- Simplifying the Mystique

Monetory Policy- Simplifying the Mystique

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Monetary policy is an important constituent of overall economic policy towards the pursuit of various economic goals, including expansion of employment, higher economic growth, and maintenance of price stability. Over the past century, the prominence of monetary policy has been on a steady rise, and presently, hardly a day goes by without some mention of monetary policy appearing in the headlines. Economists and market analysts are making considerable efforts towards continuous speculation about the likely future actions of the monetary authorities across the matured and the emerging economies. With development of a broad based financial market in India and greater integration with the rest of the world, monetary policy has assumed increasing significance in recent years. Banking sector plays a critical role in transmitting monetary policy action to spending decisions of consumers and investors, and ultimately affecting output and prices. Monetary policy, which involves regulation of money stock or short term interest rate, affects various kinds of economic and financial decision making, such as purchase of a house, car or consumer durables; starting up or expanding a business; investment in a new plant or equipment through its influence on cost and quantum of credit. Through its impact on the spending decisions of the public on goods and services, monetary policy imparts its influence on aggregate demand, and thus, on output and prices. Given the importance of banks in transmission of monetary action to spending decisions, and ultimately achieving the final objectives of economic growth and price stability, the present paper attempts to present the working of monetary policy to bankers and general public.

April-June, 2008

Monetary Policy of the Central Bank: Simplifying the Mystique
Amaresh Samantaraya*
Recently, Dr. Y.V. Reddy, Governor, Reserve Bank of India (RBI) has highlighted greater challenges for monetary policy communication in a market oriented environment in India at present in view of the stakeholders becoming larger and wider and the monetary policy by itself assuming increasing complexity in terms of operating framework and instruments (Reddy, 2008). There is an increasing recognition of the importance of market expectations and public perceptions enhancing monetary policy effectiveness. In this perspective, the present paper attempts to promote better public understanding and seeks to answer what is it that the monetary authorities do, and how they do it?

*Assistant Adviser, Monetary Policy Department, Reserve Bank of India, Mumbai. The views expressed in the paper are strictly personal. Errors and omissions, if any, are the sole responsibility of the author. The usual disclaimers apply.


economists and central Exhibit 1: Framework of Monetary Policy · Reserve Requirements Standing Facilities & Central Bank Refinance Rates Open Market Operations (including Repo) Moral Suasion Instruments · · · Operating Targets · · Bank Reserves Short-term Money Market Rates Intermediate Targets · · · Monetary/Credit Targets Long-term Interest Rates Foreign Exchange Rate Objectives · · · Price Stability Output/Employment Financial Stability 18 . As 'money' plays an important role in monetary policy. and creation/ destruction of bank reserves.CAB CALLING April-June. let us now discuss the broad outline of monetary policy framework and sequence of steps involved in the conduct of monetary policy (Exhibit 1). 'money' refers to 'wealth'. broadly outlines the salient features of conduct of monetary policy in India. (i) narrow money. RBI (1998) provides detailed discussion on the conceptual and methodological issues related to monetary aggregates in India. 2008 bankers use the word 'money' in a more specific sense. government debt management. Monetary policy involves regulation of money stock or the short term interest rate to attain monetary policy objectives such as stabilization of output and prices. The responsibility for the conduct of monetary policy generally rests with the central bank of the country. However. In this sense. other forms of assets such as a building or a car are not considered as money. we shall start with discussing what 'money' is. In India. In Indian context. The cash in our wallet is money because we can use it to buy a meal at a restaurant or a shirt from a store. Glossary of terms related to conduct of monetary policy in India is presented in the Appendix. has seen a fundamental transformation over time. Broad money includes time deposits (fixed deposits) in addition to constituents of narrow money. there is a definite trend towards making monetary policy more and more sensitive to the objectives of attaining and maintaining output and price stability. In the recent decades. as it enjoys considerable control on regulation of money stock through its monopoly over issue of currency. In view of greater integration of financial market both at home and across the geographical boundaries. narrow money and broad money are denoted as M1 and M3. 'money' is the set of assets in the economy that is used regularly by the people to purchase goods and services from other people conveniently. The measure of narrow money includes currency in circulation plus demand deposits (current account and other chequeable deposits) in the economy. In this backdrop. the Reserve Bank of India is the monetary authority in addition to its other responsibilities including regulation and supervision of the banks. and guides how to read/interpret the monetary policy statements as announced by the RBI Governor. banker to government. When we say some have a lot of money. the objective of ensuring financial stability is also gaining increasing importance. Technically. and (ii) broad money are widely used in the discussion of monetary policy. However. we basically mean that they are so rich that they can buy almost anything they want. foreign exchange management. The rest of the paper presents the monetary policy framework in general. two forms of money stock viz. respectively. Broad Monetary Policy Framework The role of monetary policy. Similarly. bank deposits against which cheques are drawn are as good as cash and can be treated as 'money'. across the countries. For them. because we cannot buy a meal or shirt with this form of assets without selling those for cash.

current short term interest rate (operating target) combined with information on expected future short term interest rates influence the shape of medium term interest rates (intermediate target). the objectives are quantified in terms of inflation rate or output/employment growth (say 2 or 5 per cent). Depending on the macroeconomic environment and global developments. Central banks in these countries have been given necessary autonomy to wield sufficient independence and flexibility over the management of interest rates and money supply towards fulfilling the 'inflation target'. lack of conclusive evidence supporting the claim of long run growth neutrality of monetary policy and the very measurement of potential output. inter alia. 2008 However. By now. Country specific conditions as also evolving macroeconomic environment in an economy determine emphasis on either of these objectives. In general. beginning with New Zealand and followed by a sizeable number of countries both advanced and emerging. instruments in the form of standing refinance facilities and statutory reserve requirements have been very useful in liquidity management. the list of monetary policy objectives includes price stability. For example. World over. and financial stability including ensuring comfortable balance of payments conditions. as medium term interest rates consist of a series of short term interest rates over time. high susceptibility of the economy to domestic and external shocks. there has been a debate on assigning single or multiple objectives to monetary policy (Rangarajan. Generally. On the other hand. Arguments in favour of single objective are in terms of clarity of the goal. which might be sub-optimal from the point of view of economic growth and social welfare. the first step in the formulation of monetary policy involves clearly defining its objectives. have also gone for direct targeting of inflation. and necessary balancing in case of multiple objectives. output/employment augmentation. consistent level/rate of intermediate target is arrived at. many developing and emerging economies prefer pursuing multiple objectives. the monetary authority has to rely on appropriate 'intermediate targets'. 2002). Hence. The choice of 'intermediate target' is largely based on its close and predictable link with the final objectives as well as ability of the monetary authority to exercise reasonable control over it. To emphasize. The relationship between money stock and bank reserves are derived from the 'money multiplier' equation (for details please see RBI. Timbergen's 'assignment rule' implies that the instrument of monetary policy should pursue a single objective of price stability which is most suitable for it. the mode and frequency of their use and related issues in order to influence the 'intermediate target'. Similarly. These monetary policy instruments alter the liquidity conditions in the system and accordingly influence operating targets such as bank reserves or short term interest rates in the desired manner. appropriate growth rate of money stock consistent with achieving particular inflation rate and output growth rate is derived from the money demand equation. foreign exchange swaps find wide application. the desired level (rate) of the 'operating target' is arrived at based on the estimates of the desired level of 'intermediate target'. money stock measures. the task at hand boils down to employing the appropriate set of policy instruments in order to achieve the desired level for the operating target. Many countries. bank reserves and short term money market rates are used as the 'operating targets'. Another related issue pertains to conflict among few objectives. 1985). RBI (1985) provides the technical details of the related exercise. an array of indirect instruments such as open market operations (OMO) including repo transactions in domestic securities.CAB CALLING In the conduct of monetary policy. ensuring commitment of the central bank to achieve this goal and enabling the public to evaluate the success of the central bank in terms of a single yardstick. accordingly. Traditionally. the operating procedure of monetary policy tactically decides the appropriate 'operating target' and the set of policy instruments. In the theoretical plane. it is most important to note that the final objectives of monetary policy as discussed above are not under its direct control in most cases. However. After estimating the desired level/rate of intermediate targets. foreign exchange rate and interest have been used as intermediate targets by various central banks depending on the country specific situation. monetary base particularly. In recent times. pursuing single objective is critricised on the grounds that it encourages conservatism on the part of the central bank and gives rise to policy bias towards low inflation. Depending on the objectives to be achieved as set in quantitative terms. 19 . a consensus has emerged in the case of industrially advanced countries that monetary policy is best suited to pursing the goal of price stability. low level of market integration. Subsequently. April-June. Variation of interest rates also influences foreign exchange rate (another intermediate target) through its impact on cross-border capital flows. due to several considerations. the ball rolling starts with preparing the set of objectives desirable to be achieved through monetary policy actions. As a first step. so that a single objective of monetary policy get entrenched into their economic system as a public commitment of the central bank.

of course. in Brazil. targets and instruments of monetary policy evolve over time. Banks play a very important role in monetary policy operations. which in turn affects spending decision for housing. In countries such as Australia. reducing aggregate demand. This makes exports more costly and imports cheaper – compressing 'exports over imports' – and thus. the Governor of the central bank solely take monetary policy decisions in terms of variation of policy instrument. In the standard textbook approach. On the other hand. these parameters have experienced steady transformation and modification over time with changing economic environment. Increase in interest rate augments international capital inflow. Here also. augments banks' deposits with the central banks (bank reserves) and reduces short term interest rates. Moreover. Similarly. the Euro Area. Of course. receives suggestions and advices formally or informally for facilitating informed judgment. Israel and New Zealand. There is also considerable variation in the decision making process across the central banks. however. tight monetary policy characterized by increase of short term interest rate raises medium term interest rates and dampens aggregate demand through curtailing investment and consumption spending. Patra and Samantaraya (2007) provide a comprehensive account of monetary policy decision making in select central banks covering both matured and emerging economies. and shapes strength of monetary policy – altitude of the flight. which ultimately leaves its impact in achieving the final objectives. Canada. policy induced changes in the instruments result in desired changes in appropriate operating and intermediate targets. as evident in the recent global financial turmoil triggered by the 'subprime' crisis in the United States.CAB CALLING April-June. with developed financial market. consumer durables. Within a country also. and thus. suitable expectation formation by the market and public in general Monetary Transmission Mechanism The monetary transmission mechanism delineates the process through which monetary policy shocks (actions) administered through changes in policy instruments and operating targets influence the final objectives. Mishkin (1996) provides schematic descriptions of working of the individual channels of monetary transmission. The analysis of monetary transmission mechanism is crucial for the conduct of effective monetary policy and its importance cannot be overemphasized. imprudent behavior of the banking sector which pose threat to financial stability. Furthermore. banks' decision on lending rates based on the signals from the monetary authority (in the form of variation of bank reserves or policy rates) critically influence spending decisions. The propagation of monetary impulses through the interest rates as explained above is known as monetary transmission through 'interest rate channel'. Sweden. In an open economy with free capital mobility. 2008 based on central bank credibility reinforces policy effectiveness. This is true in case of India also. Now. keeping pace with changes in the structure of the economy. which in turn causes appreciation of domestic currency. Conduct of Monetary Policy in India As discussed in the previous section. variation in interest rate affects asset prices. as monetary action affects final objectives after certain time lags. The Governor. Monetary policy instruments essentially influence liquidity conditions in the system and resultant variation in bank reserves defines the taking off for the monetary policy flight. Korea. through the impact of monetary policy on net worth of firms (balance sheet channel) and on bank deposits and credit (bank lending channel). institutional arrangements and level of development of the financial sector. objectives. Various dimensions of monetary policy operations vary across the countries depending upon the structure of the economy. may be inimical to softlanding in terms of ultimate effect of monetary policy on output and prices. Estimation of appropriate amount of liquidity injection to influence the operating targets precisely is a very challenging task for the monetary authority. Interest rate in the inter-bank money market is the focal point of central bank liquidity operations. Thus. which in turn affects aggregate demand explained by wealth effect and Tobin's 'Q' (asset price channel). For example. the United Kingdom and the United States. institutional arrangements and development of the financial sector. It describes the nature and strength of the influence of monetary action and the related lag structure of the effects. generally after 6 to 24 months. The preamble to 20 . open market purchase of government securities injects liquidity in the banking system. expanding production facilities or working capital requirements. The lag structure comes into picture. a 'monetary policy committee' takes collective decision on monetary policy. variation in bank reserves and short term interest rate set the tone for medium term interest rate. the monetary shocks affect aggregate demand through the channel of 'foreign exchange rate' also. the 'credit channel' comes into picture. Day-to-day liquidity management decisions. India. as depicted in Exhibit 1. rests with a committee/group at senior/middle management level or at department level responsible for market operations. This puts downward pressure on output and prices.

Several reform initiatives and institutional changes as part of the comprehensive reforms introduced since early 1990s further strengthened the scope of monetary policy operations. With development of a broad-based financial market with closer global inter-linkages. Chakravarty Committee (RBI. a consideration for financial stability in terms of quality of bank credit is also an important input for the evolving policy stance. phasing out automatic monetization of government deficit through issue of ad hoc Treasury Bills. 'financial stability' is included as another important objective of monetary policy in India. October and January. "to regulate the issue of Bank notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage". including with regard to flow of bank credit. credit. Relative emphasis was placed on either of them based on the prevailing economic conditions. ongoing financial openness and sweeping changes in the financial sector reoriented the role of interest rates vis-à-vis the quantity variables. information pertaining to other monetary and financial indicators should also be taken into account while formulating monetary policy. liquidity adjustment facility (LAF) and recourse to variation in cash reserve ratio (CRR). As recommended by the Chakravarty Committee. More details of these instruments are presented in the Appendix. shrinks/enhances the credit creating capacity of banks – so as influence investment and consumer spending as per the policy stance. How to Read RBI's Monetary Policy Statement The Governor of RBI announces the Annual Policy Statement in the month of April every year for the corresponding financial year followed by First Quarter. Ultimately. in this new framework. the Reserve Bank formally adopted a 'multiple indicator' approach in which information on interest rates. By the late 1990s. It was felt that April-June. In alignment with the policy stance. However. Our discussion in this section would be limited to the Governor's Statement on monetary policy. inflation. while money aggregates (M3) still acts as an important indicator. Consistent with the stance. Particularly. as a response to unprecedented international capital inflows in recent years.CAB CALLING Reserve Bank of India Act. the policy regime was severely constrained by heavily regulated regime consisting of high level of deficit financing. the stance stresses on limiting credit flow only to meet the legitimate requirements such as supporting investment and export demands. 1985) comprehensively reviewed the functioning of the monetary and banking systems and guided far-reaching transformation in the conduct of monetary policy in India. generally. As discussed in the previous section. these instruments attempt to withdraw/inject liquidity in the banking system – and thus. priority sector lending. It consists of three sections. although some overlapping across the phases cannot be ruled out. in situations of high inflation and overheating economy. Section I reviews and assesses 21 . appropriate liquidity is maintained in the system so that adequate/legitimate requirements of credit are met. monetary aggregates. in the month of July. inflation control and expansion of bank credit to support economic growth constituted as the dominant objectives of monetary policy in India. exchange rate. In the backdrop of the above impediments. Mid-term and Third Quarter Reviews. Since April 1998. a sequence of phases can be clearly discernable. From historical perspective. respectively. These initiatives included development and deepening of key segments of the financial market. adoption of prudential norms in alignment with global best practices towards enhancing financial stability. During economic slowdown and subdued inflation. 'monetary targeting with feedback' was introduced as the basic framework of monetary policy. this framework suggested desirable growth of money stock consistent with output and inflation objectives of the RBI. freedom to banks in determination of lending and deposits rates except a couple of segments. 1934 sets out the broad outline of the objectives as. are pooled together for drawing policy perspectives. appropriate monetary policy stance is framed.. On the contrary. administered interest rates and primitive financial sector. As enunciated in various policy documents of the Reserve Bank. Monetary policy in the form of 'credit planning' – regulating the quantum and distribution of credit flow to various sectors of the economy in consonance with national priorities and targets – assumed greater importance since adoption of philosophy of 'social control' and nationalization of banks in late 1960s. in the recent period. 2008 in the evolving situation. Thus. LAF basically addresses temporary liquidity requirements. Based on this assessment and projection of inflation and output growth for the ensuing year. the policy stance generally emphasizes adequate flow of credit to augment consumer and investment spending. In the recent years. capital flows. etc. information content of all these indicators are monitored for assessing the overall macroeconomic environment and evolving global development. the RBI undertakes active demand management of liquidity through open market operations (OMO) including market stabilization scheme (MSS). in the evolving process of conduct of monetary policy in India. there has been greater reliance on MSS and CRR to withdraw liquidity which are of the enduing nature.

in simple terms. emphasis was on explaining conduct of monetary policy in simple language. the working of monetary policy in India with the objective of making it understandable for the bankers and general public. CRR. Section I summarizes performance of imports and exports. provision of appropriate liquidity to meet genuine credit needs and support export and investment demand in the economy. government securities market. “the effectiveness of monetary policy will crucially depend on how well the public and market participants understand the central bank signals. Section III of the statement on monetary policy enumerates specific policy measures in terms of variation in the Bank Rate. Behaviour of the key segments of the financial market. equity market and corporate bonds market are also highlighted. namely money market. In view of this. likely growth of currency and deposits.” 22 . behaviour of the current and capital account. and borrowing requirement of the government. appropriate growth of money supply is projected while taking on board demand for bank c re d i t f ro m d i ff e re n t sectors. stance in the Mid-term Review of Annual Policy Statement 2005-06 was "consistent with emphasis on price stability. Given the influence of government borrowing on market interest rates and credit behaviour of banks. Appropriate nuances are used to explain the policy stance so that the underlying conditions are reflected. For example. and the movement of exchange rates as also highlights developments in the global economy counting performance of world output." On the other hand. prices. Over the years. state of the global financial system and monetary policy stance of major economies. Without much technical vigor. reverse repo/repo rates under LAF. In the backdrop of the macroeconomic assessment and taking into account emerging economic scenario. the evolving macroeconomic and global developments in terms of a stock-taking of output and inflation scenario followed by a brief review of monetary and credit growth along with the determining factors. As noted by Mohan (2005). reflecting the actions undertaken in alignment with the monetary policy stance. Finally." The second statement clearly assigns a higher weight for the objective of price stability and focuses on meeting genuine credit requirements signifying relative withdrawal of accommodations. Based on the projections of output growth and inflationary outlook. Annual Policy Conclusions The present paper attempted to explain. likely outturn of the government borrowing requirements are assessed. 2008 Statement 2005-06 puts the stance of monetary policy in terms of "provision of appropriate liquidity to meet credit growth and support investment and export demand in the economy while placing equal emphasis on price stability. Conceptual and theoretical issues relevant to formulation of monetary policy stance are also touched upon. India's linkages with the rest of the world have been increasing both in terms of trade and financial flows. the overall monetary policy stance is presented in Section II. Better understanding of the importance and content of policy announcements by the bankers and general public would facilitate improvements in picking up the policy signal appropriately and correct expectation formation. etc.CAB CALLING April-June.

Through its monopoly power over supply of bank reserves. Inter-bank call money market enables banks to bridge their short-term liquidity mismatches arising out of the day-to-day operations. With some adjustment with regard to depreciation and net factor income from abroad. Presently. in general. At present. it serves as a signal to the market and business community about tight or easy monetary policy. both reverse repo and repo are on overnight basis. The LAF operates through daily reverse repo and repo auctions on a fixed rate basis that sets a corridor for the inter-bank call money rate.0 per cent. CRR is required to be maintained as average daily balance on a fortnightly basis. refinance facilities are gradually de-linked from the Bank Rate. This is the first and foremost link in the transmission of monetary policy action. 23 . LAF Liquidity Adjustment Facility (LAF) of the RBI is a mechanism.CAB CALLING Appendix: Glossary of Terms Bank Rate April-June. Presently. CRR was reactivated since December 2006 as a monetary policy instrument in the sterilisation process. reverse repo rate and repo rate under LAF are placed at 6.0 per cent and 9. instituted in June 2000. LAF enables RBI to modulate short term liquidity under varied financial market conditions in order to ensure stable interest rates in the overnight money market. Call Money Rate 'Call money rate' is the rate of interest at which commercial banks borrow from one another on an overnight basis without recourse to any collateral. in a year.0 per cent. 1934. it represents the national income. the RBI encourages banks to place liquidity with it through reverse repo operations against the sale of government securities with an agreement to buy it back. the RBI injects or withdraws liquidity by releasing reserves to or sucking reserves from the banking system. With emergence of repo/reverse repo rates under LAF as the effective signaling rates. With raising or lowering of the Bank Rate. respectively. as a proportion to their respective net demand and time liabilities (NDTL). It measures the value of all final goods and services produced within an economy during a given period of time. GDP Gross domestic product (GDP) is a commonly used indicator measuring aggregate economic activity in an economy. At present. In the post-reform period. in addition to banks. The Bank Rate was reactivated as the central bank signaling rate since April 1997 by linking it to various rates of refinance. CRR is set at 9. the cost of borrowing from RBI for the banks becomes dearer or cheaper. On the other hand. in response to unprecedented surge in foreign capital inflows. in tight liquidity conditions. the RBI endeavours to keep the 'call money rate' is generally moves within the corridor formed by the reverse repo rate/repo rate under the LAF. 2008 Bank Rate is the rate of interest at which the Reserve Bank is prepared to buy or rediscount bills of exchange or other commercial papers eligible for purchase under the RBI Act. But. With liquidity management operations. CRR Cash reserve ratio (CRR) is a legal obligation on scheduled commercial banks to maintain certain reserves in the form of cash with the RBI. RBI injects liquidity through repo operations by purchasing government securities. When the market is in a surplus liquidity mode. Thus. the RBI is able to influence 'call money rate' which in turn acts as a signal for other market rates. By variation of CRR. primary dealers (PDs) are also eligible to participate in the call money market in India. the medium term policy was to gradually reduce CRR to its statutory minimum. which enables banks to mitigate their short-term mismatches in cash management on a daily basis with RBI.

By purchasing (selling) government securities from (to) banks.2. Samantaraya. RBI: Annual Report. Mohan. It is widely used as a proxy to measure the general price inflation in the economy. The current series of WPI with 1993-94 as base year was introduced in April 2000. Treasury Bills and dated securities of the Government of India are issued. Amaresh (2003): Transmission Mechanism and Operating Procedure of Monetary Policy in India. WPI The wholesale price index (WPI) in India captures general price movements on weekly basis for all trade and transactions. October.D. Money raised under the MSS is held in a separate identifiable cash account maintained and operated by the Reserve Bank and the amount held in this account is appropriated only for the purpose of redemption and/or buyback of the Treasury Bills and/or dated securities issued under the MSS. (2008): “The Virtues and Vices of Talking about Monetary Policy: Some Comments”. at par with the other government stock OMO Open Market Operations (OMO) involves buying and selling of government securities by the RBI to regulate the liquidity in the banking system. 2008 In the wake of very large and continuous capital inflows and the need for modulating surplus liquidity conditions of enduring nature. 5464. At present. 2. Variation of SLR alters demand for bank reserves. RBI (1998): Report of the Working Group on Money Supply: Analytics and Methodology of Compilation (Chairman: Y. C. Under the MSS. However. Tata McGraw-Hill Publishing Company Limited. Michael Debabrata Patra and Amaresh Samantaraya (2007): “Monetary Policy Committee: What Works and Where”. PP. Gregory (1998): Principles of Economics. the cost of market stabilization bonds issued under MSS is borne by the Government of India.H. NBER Working Paper No. Y. PP. the market stabilisation scheme (MSS) was introduced in April 2004 to equip the RBI with an additional instrument of liquidity management. SLR is placed at 25 per cent. RBI Bulletin. Mishkin. July.V. 10. (2002): Leading Issues in Monetary Policy. Rangarajan. MSS securities are also traded in the secondary market. Frederic S. No. Reserve Bank of India. Ph. Mumbai. while promoting soundness in the banking system by ensuring sizeable investment in safe assets. 911 – 919. PP. RBI Occasional Papers. 8. RBI Bulletin. Thesis submitted to the University of Hyderabad. New Delhi. 3. 7. Dryden Press. Reserve Bank of India. N. 4. Chakravarty). (1996): “The Channels of Monetary Transmission Mechanism: Lessons for Monetary Policy”.CAB CALLING MSS April-June. has an impact on the growth money and credit in the economy. Mumbai. Rangarajan. Reddy). SLR Statutory liquidity ratio (SLR) is a legal obligation on banks to invest a certain proportion of their liabilities (NDTL) in specified financial assets including cash. 1117 – 1125. Dholakia (1979): Principles of Macroeconomics. Reddy. 24 . RBI (1985): Report of the Committee to Review the Working of the Monetary System (Chairman: S.1 – 26. It is published with the shortest possible time lag of two weeks. Mankiw. C. outright OMO has a relatively enduring impact on market liquidity. 6. As compared to repo operations under LAF. gold and government securities. and hence. Bookwell. New Delhi. References 1. and B. This also facilitates smooth government borrowing. the Reserve Bank enhances (tightens) liquidity in the market.28.V. 11. Vol. various issues. 5. 9. Rakesh (2005): “Communications in Central Banks: A Perspective”.

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