INDIA?S FINANCIAL POLICY ADAPTING TO NEW REALITIES By S.S. Tarapore, UBS, Rs 375 India?s Financial Policy analyzes issues relating to the money market, financial sector regulation, exchange rate policy and the debate on capital account convertibility. It also focusses on monetary policy developments under R.N. Malhotra and C. Rangarajan. Divided into 11 parts and 50 chapters, it comprises articles published in 1997 in Business Standard. In the first part, S.S. Tarapore argues that a rising inflation rate imposes substantial economic costs on society while a stable price environment enhances the capacity of monetary policy to fight cyclical weaknesses: it is the best contribution monetary policy can make to growth. Tarapore counters the accusation that the Reserve Bank of India was ?monetarist??. He distinguishes tight monetary policy from monetarism and argues that the RBI?s performance would never fit the label ?monetarist??. ?There is much merit in a gradual but determined approach towards inflation control. Once a system is put in place on a trial run in 1997-98, a formal parliamentary mandate on inflation for, say, a three year period (1998-99 to 2001-02) could be obtained. The inflation mandate could be an average of 3-6 per cent with a centre point of 4.5 per cent. A medium term inflation target is desirable as monetary policy is effective only with a lag.?? Tarapore says that in the emerging monetary scenario an active interest rate policy is imperative. Monetary authorities should not hesitate to move interest rates both ways. Since April 1997, the RBI has made a conscious effort to link a number of interest rates to the bank rate. In June 1997 it used the bank rate to signal a lowering of the structure of interest rates. Part three examines how a stable money market can be developed. Part four focusses on regulation/supervision of weak banks. Part five deals with non-bank finance companies. The author says there should be a common regulatory framework for banks and financial institutions; it should be considered a fundamental prerequisite for financial institutions to operate as universal banks. Part six discusses macromanagement and the monetary impact of fiscal operations. Part seven highlights the policy adopted by the government in September 1992 to permit foreign institutional investors to invest in India. It also covers the issue of non-resident deposit schemes and examines how they can be revamped. In the second half of 1995-96, there was considerable volatility in the Indian foreign exchange market and the RBI had actively intervened. In part eight of the book, the author discusses whether such intervention was desirable. He analyzes the literature on the subject and says that a policy of greater transparency with respect to intervention and the forward liability would by itself enable the authorities to evolve a better mix of policy measures. According to him, since the cost of intervention becomes known, it will become easier to adopt a mix of policy measures for devising an optimal exchange rate policy. Part nine presents a package of measures for capital account convertibility by April 1, 2000. Part 10 sums up the monetary policy of two former RBI governors, R.N. Malhotra and C. Rangarajan, particularly their endeavours to bring about financial sector reform in the Indian economy. The book is a valuable addition to the literature on financial sector reform. It will be useful for policymakers, economists, bankers, industrialists and students of India?s financial policy.