The New Monetary Policy Index: Case Study of the RBl's Monetary Policy

Abstract

This stud y attempts to design monetary policy index to capture the stance as well as tools used by the RBI at various points in time in the backdrop of it operating frameworks. The New Monetary Policy Index (NMPI) is primarily based on methodology used by Samantaraya (2009), using both qualitative da ta as well as quantitative data. Qualitative data is collected through various circulars issued by the RBI from time to time and quantitative da ta is collected from the RBl's Handbook of Statistics on India n econ om y. The choice of monetary policy tools to be included in the index and the weights assigned to the index variables are selected through Principal Component Analysis. To examine the alignment of the MP! with the actual monetary policy stance, sharp contractions in the index a re corroborated with actual data published by the RBI for the periods and compared with inflation, industrial output and bank credit a t the time. This gives us positive results for the index designed .