The monetary scenario in the Indian economy has changed significantly in the post-reform period. The stability of the relationship between alternative monetary measures has been questioned in several studies. The changes in the structure of the money supply process have crucial implications to the transmission process of monetary policy. Although some of the earlier studies indicated the changing monetary scenario in the Indian economy, the implications of the new developments have not been addressed properly in the literature. The developments necessitate a reinterpretation of the conventional explanations of the transmission process. Among the studies which looked into the monetary policy dynamics in the Indian economy, some of the post-reform studies tried to explore the transmission mechanism in detail. The present study identifies that most of the transmission channels are working in the economy. However, the dynamics has changed with respect to the changes in the monetary relationships. The relationship between interest rate and exchange rate has changed significantly due to the influence of stock prices on foreign exchange inflow. On policy grounds, the results from the present study have some serious implications.

Money supply process in the Indian economy has witnessed significant changes in the post- reform period. The stability of the relationship between the growth of base money and broader measures of money during the period has been questioned in several studies. In this regard, Jha and Rath (2001) find that neither M1 nor M3 is cointegrated with reserve money. The changing determinants of alternative contributing factors to the money stock has significant implications for the transmission process of monetary policy. Some of the earlier studies, like Kohli (2001), indicate the changing monetary scenario in the Indian economy with special reference to the implications of foreign capital inflow for the money supply process. It has been identified that foreign exchange inflow associated with portfolio investors from foreign countries causes appreciation of the rupee. On the other hand, money stock in the economy has expanded significantly due to the foreign exchange inflow. The implications of these developments necessitate a reinterpretation of the conventional explanation of the transmission process. In this regard, the dynamics related to interest rate changes has to be analyzed.

Among the studies which looked into the monetary policy dynamics in the Indian economy, some of the post-reform studies tried to explore the transmission mechanism in detail. Compared to the earlier studies which failed to establish conclusive evidences for the channel based explanation in the transmission process, post-reform studies, such as Ray et al. (1998), came out with evidences of interest rate and exchange rate channels in the Indian economy. Using a VAR model, it is shown that there exists a long-run equilibrium among money, income, prices and exchange rate in India. It was observed that monetary shocks and exchange rate shocks are endogenous in the post-liberalized era. Moreover, the results suggest significant changes in the monetary relations between the pre-and post-liberalized periods.

Applied Finance Journal, Money Supply Process, Monetary Policy Transmission, Indian Economy, Macroeconomics, Interest Rates, Vector Error Correction Models, Reserve Bank of India, Error Variance Decomposition, Indian Stock Markets, Financial Liberalization, Capital Arguments, Liberalization Process, VAR Models.