ISSN (Online) - 2349-8846

Money, Banking and Finance 2016Subscribe to Money, Banking and Finance 2016

Indian Exchange Traded Funds

This paper seeks to model the long-run relationship between Indian exchange traded funds or ETFs and their underlying indices. The findings indicate that the relationship fails to fully explain the price dynamics of Indian ETFs. In other words, Indian ETFs serve as an imperfect hedge for investors who have exposure to respective underlying indices.

FII Trading Activity and Intraday Volatility

This paper investigates whether the trading activity of foreign institutional investors adversely affects (intraday) volatility in the Indian stock markets. It reports that aggregate trading activity of FIIs dampens market volatility whereas aggregate trading activity of domestic investors exacerbates volatility. Further, the paper finds that positive shocks in aggregate trading activity have a greater impact than negative shocks; this asymmetry is stronger for aggregate domestic trades. Using a proprietary data set, the paper also relates individual stock volatility to tick-by-tick transaction volume, conditional on trader type and transaction type. The intraday results show that trading among FIIs does not increase stock volatility, but when FIIs sell to domestic clients or when domestic clients trade amongst themselves, volatility increases.

Furthering the Financial Inclusion Agenda in India

Exploiting household level survey data, this paper analyses the interface between gender and financial inclusion. The multivariate regressions that take on board several household and state-level controls suggest significant disparities in both the access to as well as the use of finance. More specifically, female-headed households are 10% less likely to access formal finance as compared to households that are headed by males. Similar evidence carries over to the use of finance as well. From a policy standpoint, the paper highlights several policy interventions which can serve the cause of greater financial inclusion of women in the country.

Do Foreign Banks in India Indulge in 'Cream Skimming'?

Foreign banks in developing countries are often found to indulge in "cream skimming," a lending strategy that targets only wealthy segments of the credit market and excludes small and marginal borrowers from the general pool of borrowers. This paper attempts to investigate whether lending patterns of foreign banks in urban regions of Indian states are indicative of such practices. Using credit data on urban regions of 21 states of India for 1999-2011, this paper finds empirical evidence of cream skimming by foreign banks in India.

Procyclical Credit Growth and Bank NPAs in India

Despite recent monetary policy accommodation, bank credit growth continues to decelerate in India, partly due to huge non-performing asset overhangs in banks. This paper explores various issues related to surging NPAs in banks and observes that excessive credit growth in the past is a major reason that has led to current NPAs. Other factors such as contemporary economic conditions, capital adequacy and overall levels of efficiency of the banks have also affected the incidence of NPAs. For promoting financial stability and enhancing monetary policy effectiveness, it is suggested that macro-prudential aspects such as counter-cyclical capital buffer and dynamic provisioning need to be strengthened. There is also a need to explore if corporate governance concerns could be instrumental in adversely impacting the loan book of state-owned banks.

Financial Reforms in an Endogenous Money Economy

An examination of the Reserve Bank of India's monetary policy leaves little doubt that India can be suitably characterised as an endogenous money economy. In an endogenous money environment, financial reforms will prove ineffective in stimulating credit supply to large commercial borrowers. They may, however, prove counterproductive by sharpening the credit constraints faced by agricultural and other petty producers in the economy.

The Changing Face of Indian Banking

Indian banking is passing through its most severe period of stress in over a decade. It is important, however, not to draw conclusions for banking policy from a snapshot of the most recent period--the totality of the post-reform experience must be taken into account. That larger experience shows that India's public sector-dominated banking system has served the economy well by improving its performance in respect of both efficiency and stability. Looking ahead, changes in governance and management are required, but it is possible to effect these within the framework of public ownership.

The New Keynesian Paradigm of Monetary Policy

While Keynes was sceptical of the efficacy of monetary policy , the current mainstream macroeconomic consensus , "New" Keynesian macroeconomics , accords it primacy in the process of maintaining both price and output stability. This consensus depends on three relationships: demand is inversely dependent on the interest rate, inflation is positively related to the output gap and the central bank can control interest rates to achieve an optimum combination of price and output. This paper presents a theoretical critique of this consensus from an "old" Keynesian perspective since Keynes had raised fundamental objections to each of the three relationships .

Calm before the Storm?

It is generally believed that India is doing far better than most emerging market economies in these times of global economic turmoil. Emerging markets are facing capital flight, with large-scale outflows, especially since the second half of 2015, with the trend expected to continue in 2016. India has been less affected than others, but is clearly vulnerable due to the large number of Indian firms that are exposed to external borrowings, a weak rupee, a year or more of declining merchandise exports, falling corporate profitability, and stressed corporate balance sheets.

Dynamic Stochastic General Equilibrium Modelling

In recent years Dynamic Stochastic General Equilibrium models have come to play an increasing role in central banks, as an aid in the formulation of monetary policy (and increasingly after the global crisis, for maintaining financial stability). DSGE models, it is claimed, are less a-theoretic than other widely used models such as VAR, or dynamic factor models. As the models are "structural," they are supposed to be immune to the Lucas Critique, and thus can be "taken to the data" in a meaningful way. However, a major feature of these models is that their theoretical underpinnings lie in what has now come to be called as the New Consensus Macroeconomics. Using the prototype real business cycle model as an illustration, this paper brings out the econometric structure underpinning such models. A detailed analytical critique is also presented together with some promising leads for future research.

Monetary Policy Dilemmas at the Current Juncture

Monetary policies in advanced economies and emerging markets face quite different challenges at the current juncture. In the advanced countries, current dilemmas derive from the normalisation of unconventional monetary policies. The short-term dilemma is to determine when to start exiting extraordinary policies and selecting appropriate tools, as conventional tools may not be very relevant during this phase. The medium- to long-term challenges relate to the sequencing, pace and mechanics of normalisation. Monetary policy in emerging markets needs to cope with the familiar dilemmas of fiscal dominance, the growth-inflation trade-off and the "impossible trinity." With fiscal parameters in control, and food and commodity prices subdued, the chief dilemma currently confronting emerging markets involves a trade-off between targeting divergent domestic and external cycles. Although they are now better placed to absorb a sudden stop, the impact is likely to be differential, with those with weaker macroeconomic parameters suffering greater pain.

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