Efficacy of monetary policy in times of economic slowdown in a developing open economy: evidence from india since global financial crisis

Abstract

The RBI uses various interest rates in its monetary policy. They are used to control the money supply which ultimately enables RBI to keep the inflation rate within the tolerance level. The present study considered such three policy rates namely, Call Money Rate, Repo Rate and Cash Reserve Ratio (CRR) and examined their impact on money supply (M3). However, due to the problem of multicollinearity, the call money rate was later dropped from the regression model. The data for the research was gathered from RBI’s website and its databases. The examination was done through a regression analysis of M3 on these policy rates. The results obtained were not entirely in consonance with the theory, which assumes a negative relation between these policy rates and M3. There are several reasons for this inconsistency, like fiscal stimulus and some easy money policies adopted by the government, which are discussed. There are also some limitations of the study, which might be the reason for inconsistent results and might need further scrutiny, which is beyond the scope of this research work.