MONETARY POLICY THROUGHOUT THE YEARS IN INDIA :
Monetary Policy in early years of independence :
The primary aim of monetary policy in the initial years of RBI was to maintain the sterling parity, with exchange rate being the nominal anchor of monetary policy. Under this, at least 40% of the total notes issued were to be backed by gold bullion and sterling.
Post independence till late 1960s, the role of the central bank was aligned with the planned development process of the nation in accordance with the 5-year plans regulating credit availability, employing OMOs, bank rate, and reserve requirement towards this end.
Monetary Policy from 1960 to 1980 :
With the nationalization of major banks in 1969, the main objective of monetary policy through the 1970s till the mid-1980s was the regulation of credit in accordance with the developmental needs of the country.
Monetary Policy Post 1985 :
Sukhmoy committee recommended for Monetary Aggregates like inflation control, reduction of fiscal dominance, step away from financial repression and credit to the growing economy as the target of monetary policy.
Monetary Policy post LPG Reforms :
RBI began to deemphasize the role of monetary aggregates and implemented a Multiple Indicator Approach (MIA) to monetary policy in 1998 encompassing all economic and financial variables that influence the major objectives outlined in the Preamble of the RBI Act.
A multiple indicator approach was not just looking at money supply but a group of economic variables including money supply, inflation, the interest rate in money markets, exchange rate, credit growth, fiscal deficit, and capital inflows.
FLEXIBLE INFLATION TARGETING REGIME :
In 2016, transition was made towards flexible inflation targeting and a six member Monetary Policy Committee (MPC) was constituted for setting the policy repo rate. The Monetary Policy Framework Agreement (MPFA) was signed between the Government of India and the RBI in February 2015 to formally adopt the flexible inflation targeting (FIT) framework. This was followed up with the amendment to the RBI Act, 1934 in May 2016 to provide a statutory basis for the implementation of the FIT framework.
