The Impact of Monetary Policy on Indian Economy during Post Reform Period

Abstract

Inflation is a sustained increase in the general price level of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation reflects a reduction in the purchasing power per unit of money, a loss of real value in the medium of exchange and unit of account within the economy. A financial crisis is a situation in which the values of assets drop rapidly. While the global financial crisis is spreading fast, policy makers (regulators, central bankers, finance ministers) are desperately trying to cope up with a situation in many ways unprecedentedly. Monetary policy can influence growth by helping to create favorable environment for saving and investment. In this paper an attempt has been made to study the impact of monetary policy on the Indian economy by taking into account inflation and economic growth. The period of study is 25 years from 1991-92 to 2015-16. The Augmented Dickey Fuller (ADF) test, stability test, CUSUM test and pair-wise granger causality test are adopted to find out the impact of monetary policy on Indian economy during post reform period. The result reveals that the monetary policy measures are effective in regulating both inflation and economic growth.