Keeping in view the changing ground realities and macro-economic developments, the RBI will adjust its domestic monetary and exchange rate management policies, the central bank states.

The RBI also made it clear that it is committed to a shift from using direct tools to indirect tools to handle the monetary policy. To this effect, the RBI relied increasingly on indirect instruments like bank rate and repo rate in 1997-98.

"The stance of the monetary policy in 1998-99 reflects developments in 1997-98 and the broad economic objectives of attaining a real GDP growth of 6.5-7 per cent for 1998-99 and an inflation rate of 5-6 per cent. Accordingly, M3 growthhas been projected at 15-15.5 per cent," the report states.

The bank rate and the repo rate have emerged as signals for the movements in interest rates in the economy, thereby providing a greater range of instruments to the RBI.

"Open market operations, including repo operations in conjuction with the bank rate, provided the main planks of monetary management," the RBI states. Repos were often used to absorb surplus liquidity as well as provide information on short-term liquidity conditions. Besides, daily fixed-rate repos of three-to-four day tenure, first introduced in November 29, 1997, tended to set a floor for call rates and helped reduce wide fluctuations in the call money market since the refinancing facility linked to the bank rate operates as a ceiling.

Although the central bank continued to make conscious efforts to promote the use of indirect policy instruments, direct instruments were continued and used to meet specific circumstances. "Instruments such as the cash reserve ratio, sectoral(export) and general refinance were, however, continued and used to meet specific circumstances," the central bank states.

Besides, the bank has explicitly preferred to adopt a multiple-indicator approach wherein movements not only in money supply, but also in a host of economic variables were tracked for policy responses.

Keeping this in mind, the RBI has said that the formulation of a monetary policy requires information on an array of indicators such as data on currency, credit extended by banks and financial institutions, fiscal position, trade, capital flows, interest rates, inflation rate exchange rate, refinance and transaction in foreign exchange available on high frequency basis. "Once developed, the information base will enable the formulation of a clear-cut interest rate channel of transmission effects of the monetary policy," the RBI states.

In view of the changing dimensions and the depth of the financial sector, consequent to the introduction of reforms, the central bank had set up aworking group on "Money Supply: Analytics and Methodology of Compilation" in December 1997 to examine the analytical aspects of monetary survey. "The group has submitted its report in June 1998 and a core group has been constituted to implement the recommendations," the RBI states.