The twin objectives of the monetary & credit policy continues to be maintaining price stability and ensuring availability of adequate credit to the corporate sector. However, the traditional emphasis on the use of broad money as an intermediate target has been de-emphasised although the growth in broad money (M3) continues to be used as an important indicator. The composition of reserve money too has changed with net foreign exchange assets currently accounting for nearly one-half of reserve money.
Since 1998-99, the Reserve Bank of India (RBI) has been adopting a multiple indicator approach in its monetary policy. In this approach, interest rates or rates of return in different markets like money, capital and government securities markets are juxtaposed with data on currency, credit extended by banks and financial institutions, fiscal position, trade, capital flows, inflation rate, exchange rate, refinancing and transactions in foreign exchange, etc. to draw policy perspectives.
The thrust of the policy in recent years seems to be to develop an array of instruments to transmit liquidity and interest rate signals in the short-term. The RBI introduced a liquidity adjustment facility (LAF) in June 2000 to modulate short-term liquidity and signal short-term interest rates. The LAF operates through repo and reverse repo auctions and sets a corridor for the short-term interest rates.
The medium-term objective of the policy is to make the call and term money market purely a market for banks, while non-bank participants
