Monetary Policy and the Transmission Mechanism by Dr C Rangarajan
Dr C Rangarajan’s delivered a very informative and interactive talk on Monetary Policy and The Transmission Mechanism which provided great clarity on the subject to those who attended it.
The session began with a highlight on the need for monetary policy with clearly defined goals. Dr C Rangarajan explained with the help of an illustration about the goals of the Federal Reserve of the USA which focuses on price stability and maximum employment whereas the goals of the RBI – which currently has an inflation targeting goal –are to maintain Consumer Price Inflation (CPI) at 4 ± 2%, while supporting growth. He elaborated on why the goals need to be contextual to the economy and how the monetary policy goals have evolved in India from supporting growth in the initial days of industrialisation to the current scenario.
The speech continued highlighting various tools that central banks have at their disposal through which they try to effectively implement the monetary policy and transmit the changes it effects in the cost of funds and the availability of the money supply to the economy of the country. He went on to explain how the Reserve Bank of India has been using various tools like the Cash Reserve Ratio (CRR), the Open Market Operations (OMOs), and gave the rationale of why a particular tool was used at a given point in history. There was a discussion on why CRR was the preferred tool in the initial days and his compulsions for increasing CRR multiple times during his tenure as the RBI Governor. He then went to explain the limitations of its usage and how over the years different tools were used till recently when OMOs became the preferred tool.
The ex-RBI governor then explained the students' various reasons for the RBI resorting to Swaps in the most recent past to infuse liquidity into the system and what may be its implications as compared to resorting to OMOs. CRR as a stand-alone tool had its limitations and how effecting changes in the Repo / Reverse-repo rates without sufficient supporting OMOs may be of limited impact. Finally, he touched on the various short-term and long-term implications of using SWAPS as a liquidity altering tool.
At the end of the talk, Dr Rangarajan responded to student queries on questions like the impact of both, OMOs and Swaps on the various sectors of the economy and the central bank’s need to maintain sufficient reserves, the importance of cordial relations between the Reserve Bank and the government of India.
For the benefit of the students, Dr Rangarajan spent considerable time and effort to review the content of the Financial Markets course and all the supplemental contemporary reading material the faculty had sent out to the students so that they may better understand the theory well. This enabled the students and alumni of the Financial Markets course to get very relevant and practical insights from the vast experience.
The general audience, comprising people from different walks of life in society, who had come to attend due to their interest in financial markets, also got an opportunity to add to their knowledge quotient.