Econometric Models of Forecasting Money Supply in India

Monetary policy is a very important factor influencing the working of the financial sector of the economy. Forecasting money supply is a part and parcel of designing monetary policy. This paper reviews the econometric models of forecasting money supply in India for the entire post independence period, points out their gaps and tries to fill these gaps. Following are the findings of the paper: (a) Money stock appears as an important determining factor of the economic variables like exchange rate and export volume, which in turn determine the external balance. (b) RBI’s operations in the foreign exchange market affect the exchange rate not immediately, but at 12 months lag. (c) The exchange rate movement may affect the RBI decision to interfere in the foreign exchange market in the immediate short run, but not in the long run. (d) In short run export performance may in some cases give incentives to banks to offer loans, but not in long run. Exercising of discretionary power by bank managers in matter of extending credit facilities is a short-term and not much frequent phenomenon. (e) In absence of bank credit to commercial sector export would be negative or there will be net import.