Reserve Money Operating Target Of Monetary Policy

The Reserve Bank of India has identified reserve money as the principal operating target of the monetary policy.

According to the RBI, market determined interest rates, financial innovation and frequent adjustments of reserve requirements have imparted volatility to the money multiplier. Consequently, the conventional role of reserve money in determination of money supply has become blurred under the central bank's liquidity operations.

"In the process, reserve money changes have emerged as the principal operating target of the monetary policy, with liquidity adjustments setting up corridors for the money market rates, enabling a gradual softening of yields in the gilts market and ensuring orderly conditions in the foreign exchange market," the RBI annual report points out.

 

During 2000-01, reserve money grew by 8.1 per cent compared with 8.2 per cent during 1999-2000. However, adjusted for the impact of cash reserve ratio (CRR) changes, reserve money growth worked out to be about 11 per cent in the last fiscal lower than 13 per cent increase in 1999-2000. The approximate release of resources on account of CRR changes in 2000-01 was at Rs 7,500 crore as against Rs 13,000 crore in the previous fiscal.

The increase in the reserve money during 2000-01 was mainly on account of an accretion of foreign currency assets by Rs 27,463 crore as against Rs 27,382 crore during 1999-2000. The net domestic asset of the apex bank, however, went down by Rs 4,444 crore during the last fiscal compared with a decline of Rs 6,528 crore during the fiscal before.