Actions of monetary authorities influence economy: ICFAI Chancellor

Hyderabad: The impact of actions of the monetary authorities on the economy depends on the reaction of the business units to changes in interest rate, said Dr C Rangarajan, Chancellor, ICFAI, Hyderabad and former Governor of Reserve Bank of India. Delivering a lecture virtually on the topic ‘Evolving Contours of Monetary Policy’ recently conducted by […]

Hyderabad: The impact of actions of the monetary authorities on the economy depends on the reaction of the business units to changes in interest rate, said Dr C Rangarajan, Chancellor, ICFAI, Hyderabad and former Governor of Reserve Bank of India. Delivering a lecture virtually on the topic ‘Evolving Contours of Monetary Policy’ recently conducted by the ICFAI, Hyderabad, Dr Rangarajan spoke extensively about objectives of monetary policy, instruments available to monetary authorities, and effectiveness of monetary policy in influencing the economy. In any economy, price stability was important as in a situation of reasonable stability, savings would increase. In the environment of rising inflation, investments may get diverted to speculative attributes, he said.

The ICFAI Chancellor elucidated the concepts of the threshold of inflation and inflation targeting. While in developed economies inflation beyond two per cent was considered undesirable, in India as per the mechanism introduced in 2019, the Central Bank decided to keep the inflation at four per cent per annum plus or minus two per cent, he said. The main reason why a margin was provided was to accommodate sudden jerks and due to the fact that actions of monetary authorities take time to achieve results, he said.

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The actions of monetary authorities can influence the economy through changes in money supply and interest rates. The changes in interest rate were brought through policy instruments like repo rate, he said, adding that changing policy rate, along with buying and selling securities helps the Central Bank influence the system in the country. In his opening remarks, ICFAI Vice-Chancellor, Dr J Mahender Reddy said the monetary policy challenges were changing over time, but there was growing concern about the efficiency of the transmission mechanism.