Abstract. This article tries to investigate how monetary policy and interest rate pass-through is effective in India after adequate autonomy was given to commercial banks through financial sector reforms and Banking Sector Reforms. The study uses Milton Friedman and Robert Mundell’s perspectives on the role of monetary policy in achieving internal and external sector equilibrium. For this purpose, the study uses ADF-PP unit root test, Engel Granger’s Causality Test and trend line analysis. The study observed that the monetary policy is effective in influencing major macroeconomic variables like GDP, Exports, Imports and Capital Flows. Similarly, the Reserve Bank’s Lending Rate and Commercial Banks Prime Lending Rates are directly correlated in the entire study period. But the study did not find any causality between money supply with current account deficit and exchange rate lacks significance of monetary policy in the context of automatic restoration in the external sector. The overall conclusion of the study is that the monetary policy is very effective in influencing major macroeconomic variables via strong interest rate pass-through in India even after adequate autonomy was given to Commercial Banking Institutions.

Keywords: Money Supply, Interest Rate, Monetary Policy, Capital Movements, Granger Causality.