Monetary Policy and Impact of FII Inflows (Published)

Brief Abstract: The world is global today. So are the financial markets. The world today trades more in finance than in goods and services. Monetary policy of different countries which target domestic inflation and interest rates as its objective is facing the challenge of these flows on the net liquidity in the economy. Traditionally we measured money supply by M3, and it served its purpose. But with excessive FII flows in the capital markets M3 ceases to be an indicator of money available to various sectors in the economy. Though M3 is the aggregate of measuring money supply. But in the excessive capital flows, the amount of liquidity in the economy increases more than the amount of money supply. M3 fails to measure that. A new measure of money supply is Aggregate Banking Finance.

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