Experience with monetary targeting in India

In India, the monetary targeting exercise produced mixed results. Notwithstanding the reasonable stability of the money demand function, the expansion of money supply emanating from monetisation of government deficit aid in a more recent period from capital flows rendered the control of monetary aggregates difficult. With increasing market orientation of the financial structure and international capital flows, it needs to be pondered whether monetary targeting approach could ensure internal and external stability when the avowed objective of policy is to move away from a classical reserve money based monetary policy operating procedure by df-emphasising reserve requirements as active instruments of policy.