Monetary Conditions Index for India

The authors attempt to construct a monetary conditions index (MCI) for India in order to take both interest rate and exchange rate channels simultaneously into consideration while evaluating the stance of monetary policy and evolving monetary conditions. The paper also constructs a "broad" MCI which incorporates credit growth as an additional indicator of monetary conditions. Since the index is constructed using differences between actual and an “arbitrarily” chosen base period, the index only represents a relative degree of change and not an absolute measure. No significance is usually attached to the level of the index and it should not be interpreted too mechanistically. [RBI Occassional Papers, Winter 2006].