1970 to 1990:

Since independence, the Keynesian school of thought prevailed for the next 2
decades or so. At the onset of the decade of 1970, gradual phasing out of Keynesian
economic model began and Indian government and its economists started drifting
towards the Friedman school of thought. The Reserve Bank of India started policy of
monetary targeting. The reasons for this were the failure of the earlier Keynesian
model. Also, internationally, in several economies of the world, it was becoming
evident that long-run sustained inflation and excessive money growth were closely
associated. This was bolstered by econometric proof of the stability of the demand
for money and the persuasive argument that a central bank could exercise sufficient
control over money through its monopoly over currency and reserves. In India,
systematic evidence was turned in on stability in money demand and the money
multiplier, and a predictable chain of causation running from changes in money
supply to prices and output.
1970s also saw major events in the political spectrum. The then prime minister Indira
Gandhi announced nationalization of several private banks. The role of public sector
banks thus became dominant in the Indian economy. Also, it instilled confidence
amongst the Indian common citizen. This move subsequently increased savings in
the country and monetary flow path in the Indian economy saw a drastic change.
Until the early 1980s, the Indian economy was virtually a closed one. Prices of a
significant number of commodities were administered in India at that time. To sustain
these prices at a steady level, government subsidies were often necessary and this
was one of the factors that led to a chronic budget deficit. These deficits were either
financed through ad hoc treasury bills or through indirect borrowings, mostly from
nationalised banks. The first led to more or less automatic monetisation. Net RBI
credit to the government was the dominant factor behind reserve money expansion
and the consequent expansion in money supply. To control the money supply, the
RBI had to increase the cash reserve ratio (CRR) from time to time.
So far as the market borrowing is concerned, to facilitate the process, interest rates
were administered and were kept at an artificially low level. The entire structure of
interest rates was complicated and had multiple layers.
The late 1980s saw a major financial crisis in India known as the balance of
payments crisis.

1990-2001:
The balance of payments crisis in late 1980s and in 1990 completely shook the
Indian economy. International political events such as the Unification of Germany,
collapse of the Soviet Union and fall of Soviet model of economics, eventually led to
major economic reforms in India. India finally opened its doors for the world. Year
1991 saw major economic reforms in India and the economy was globalized,
liberalized and privatized. With India finally allowing private enterprises to thrive and
allow foreign companies to invest heavily and ending the license raj, Indias
monetary policy too saw enormous change.
One of the first important financial reforms that India introduced after the balance of
payments crisis in 1990-91 was to change to a market-determined exchange rate
system and to introduce current account convertibility in a phased manner. This
change was one of the striking successes of the early years of economic reforms. A
significant development in this area with far-reaching implications was the
reactivation of the Bank Rate, which was linked to all other interest rates, including
the Reserve Banks refinance rate. A significant development in this area with farreaching implications was the reactivation of the Bank Rate, which was linked to all
other interest rates, including the Reserve Banks refinance rate.
The decade also saw the onset of multi-indicator approach used by the RBI towards
monetary policy.

2001-Present:
In the late 90s and beginning of 2001, the government of India under the leadership
of Atal Behari Vajpayee pushed for several economic reforms which propelled the
GDP rate to more than 7 percent per annum consistently. The Indian economy from
2004 to 2008 saw growth rates exceeding 8 percent per annum.
The RBI once again undertook the task of creating a corridor for the short-term
money market rate in a phased manner, finally enabling to carry out liquidity
management in India through open market operations (OMO) and reverse repo/repo
operations. The second major change was in the evolution of policy coordination,
culminating in the Fiscal Responsibility and Budget Management Legislation. The
objective of the legislation was to impose fiscal discipline on government spending
and ensure a transparent and accountable fiscal system. The third major change
was in clearer demarcation of stabilisation policies from structural policies. Earlier,
major monetary policy announcements in India used to take place twice a year. As
stabilisation of financial markets often needed quick and immediate action, it was
repeatedly articulated by the RBI management that necessary policies for that
purpose would be taken immediately and certainly not after a long wait of six
months. This, however, did not apply to policies that had long-run structural
implications. Both

the government of India and the RBI jointly attempted to implement the International
Financial Standards and Codes.