It is important that money market and monetary policy should have a link with each other for the financial progress of developing country like India. The central bank of India i.e The Reserve Bank of India influence monetary condition through management of liquidity by operating in varied instruments. It controls the money supply and financial markets through its various direct and sometimes indirect instruments.
The direct instrument consist of:
- cash reserve requirements
- limits on refinance
- administered interest rates
- quantitative and qualitative instruments
The cost, availability and flow of funds comes under the direct influence of central bank of India but in deregulated and liberalized economy interest rates are determined by the market forces even in such cases there is need for direct intervention by the apex monetary maker to come and influence the money supply in the economy.
The success of indirect instruments depend upon existence of vibrant,liquid and efficient money market which is well integrated with the financial markets such as the government and foreign exchange market.Such an integrated and efficient market is necessary ,for monetary policy impulses,sent through money market intervention to be reflected in the monetary conditions, through the transmission of general rates of interest.
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2 Comments. Leave new
Precise, well written 🙂
Well written..