Changes in the Money Supply Process and Its Impact on Monetary Policy Transmission in the Indian Economy

The monetary scenario in the Indian economy has changed significantly in the post-reform period. The stability of the relationship between alternative monetary measures has been questioned in several studies. The changes in the structure of the money supply process have crucial implications to the transmission process of monetary policy. Although some of the earlier studies indicated the changing monetary scenario in the Indian economy, the implications of the new developments have not been addressed properly in the literature. The developments necessitate a reinterpretation of the conventional explanations of the transmission process. Among the studies which looked into the monetary policy dynamics in the Indian economy, some of the post-reform studies tried to explore the transmission mechanism in detail. The present study identifies that most of the transmission channels are working in the economy. However, the dynamics has changed with respect to the changes in the monetary relationships. The relationship between interest rate and exchange rate has changed significantly due to the influence of stock prices on foreign exchange inflow. On policy grounds, the results from the present study have some serious implications.