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Monetary Policy of India - 1990 Reforms and its Evaluation

square Monetary Policy Reforms in India

The Monetary Policy of the RBI has undergone massive changes during the economic reform period. After 1991 the Monetary policy is disassociated from the fiscal policy. Under the reform period an emphasis was given to the stable macroeconomic situation and low inflation policy.

Monetary Policy in India

The major changes in the Indian Monetary policy during the decade of 1990.

  1. Reduced Reserve Requirements : During 1990s both the Cash Reserve Ratio (CRR) and the Statutory Liquidity Ratio (SLR) were reduced to considerable extent. The CRR was at its highest 15% plus and additional CRR of 10% was levied, however it is now reduced by 4%. The SLR is reduced form 38.5% to a minimum of 25%.
  2. Increased Micro Finance : In order to strengthen the rural finance the RBI has focused more on the Self Help Group (SHG). It comprises small and marginal farmers, agriculture and non-agriculture labour, artisans and rural sections of the society. However still only 30% of the target population has been benefited.
  3. Fiscal Monetary Separation : In 1994, the Government and the RBI signed an agreement through which the RBI has stopped financing the deficit in the government budget. Thus it has separated the Monetary policy from the fiscal policy.
  4. Changed Interest Rate Structure : During the 1990s, the interest rate structure was changed from its earlier administrated rates to the market oriented or liberal rate of interest. Interest rate slabs are now reduced up to 2 and minimum lending rates are abolished. Similarly, lending rates above Rs. Two Lakhs are freed.
  5. Changes in Accordance to the External Reforms : During the 1990, the external sector has undergone major changes. It comprises lifting various controls on imports, reduced tariffs, etc. The Monetary policy has shown the impact of liberal inflow of the foreign capital and its implication on domestic money supply.
  6. Higher Market Orientation for Banking : The banking sector got more autonomy and operational flexibility. More freedom to banks for methods of assessing working funds and other functioning has empowered and assured market orientation.

square Evaluation of Monetary Policy in India

During the reforms though the Monetary policy has achieved higher success in the Monetary policy, it is not free from limitation or demerits. It needs to be evaluated on a proper scale.

  1. Failed in Tackling Budgetary Deficit : The higher level of the budget deficit has made the Monetary policy ineffective. The automatic monetization of the deficit has led to high Monetary expansion.
  2. Limited Coverage : The Monetary policy covers only commercial banking system leaving other non-bank institutions untouched. It limits the effectiveness of the Monetory Policy in India.
  3. Unorganized Money Market : In our country there is a huge size of the unorganized money market. It dose not come under the control of the RBI. Thus any tools of the Monetary policy dose not affect the unorganized money market making Monetary policy less effective.
  4. Predominance of Cash Transaction : In India still there is huge dominance of the cash in total money supply. It is one of the main obstacles in the effective implementation of the Monetary policy. Because Monetary policy operates on the bank credit rather on cash.
  5. Increase Volatility : As the Monetary policy has adopted changes in accordance to the changes in the external sector in India, it could lead to a high amount of the volatility.

There are certain drawbacks in the working of the Monetary Policy in India. However, during the economic reforms it has got different dimensions.

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