Scope of monetary policy in India: Monetization of Fiscal deficit?
The world is witnessing a crisis bigger than the previous crisis. The responses from the central bank are incredible and rare. The monetary tools can be categorized into four main categories. First, today is a short-term interest rate that influences the cost of funds in the system. It also plays an important role as far as signals in the system are concerned. The second tool is lending to financial institutions to manage liquidity. Lending can be targeted to support certain segments. The third tool is asset purchases (assets can vary from government bonds to private sector securities like corporate bonds, equity, etc. This again can affect the liquidity. The fourth tool is regulation and supervision. The regulations like reserve requirements, capital, liquidity requirements can affect the markets. In the advanced economies interest rate is close to zero lower bound. And that puts restriction over the central bank as far as the interest rate is concerned. As far as the Reser...