ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

Articles By Amaresh Samantaraya

The Reserve Bank of India’s Trilemma Choice

The Reserve Bank of India, like most central banks, has to choose between the three corners of the impossible trinity, that is, free capital flows, monetary policy independence and exchange rate stability. This article uses the Aizenman et al (2008) framework to analyse the trilemma choice of the RBI over 2000–22. The results provide interesting insights into the RBI’s shifting position in managing the impossible trinity over the years.

Understanding Inflation Dynamics in India

The flexible inflation targeting framework was formally adopted by India in 2016 with an amendment to the Reserve Bank of India Act. This paper attempts to throw light on the dynamics of consumer price index headline, core, and food inflation, using a relatively young and atheoretical approach pioneered by Stock and Watson in 2007. The empirical results, indicating that the behaviour of core inflation is different from that of headline and food inflation, have implications for the conduct of monetary policy.

RBI’s Interest Rate Policy and Durable Liquidity Question

The Reserve Bank of India should take into consideration longer term liquidity management for smooth monetary transmission. It must clearly define “durable liquidity” in the form of some quantitative variable and set its desired path for one year or so. This will anchor expectations on future interest rate and liquidity premium, and certainly improve the link between the interest rates in various terms to maturity. Moreover, the desired target for durable liquidity can also serve to improve overall monetary policy effectiveness.

An Index to Assess the Stance of Monetary Policy in India in the Post-Reform Period

The Reserve Bank of India has formally adopted the "multiple indicator approach" in the conduct of monetary policy since April 1998. During this period, sole reliance on traditional indicators of monetary aggregates or policy rates is not adequate to reflect the stance of monetary policy. This paper develops a monetary policy index by synthesising the extracted signals from the policy documents and quantitative information embedded in key indicators. The mpi so constructed was used to assess the impact of monetary policy on macroeconomic variables such as interest rates, bank credit, inflation, and output growth during the post-reform period. It was observed that while monetary policy has an instant influence on interest rates, the impact on inflation and output was realised with a lag of around 6 to 18 months.

Indian Experience of Inflation

An assessment of the inflation record of India reveals that inflation increased from the 1970s onwards before moderating in the mid-1990s. Supply shocks, both due to a setback in agricultural production and international oil prices, and monetary expansion due to automatic monetisation of the fiscal deficit were the major contributory factors to higher inflation. Reform initiatives since the early 1990s towards developing a broad-based financial market, particularly activation of the government securities and forex markets coupled with improved monetary-fiscal interface enabled better monetary management since the second half of the 1990s. Moreover, judicious supply management through buffer stocks of foodgrains and import of sensitive commodities containing the adverse impact of supply shocks also played an important role. It can also be noted that notwithstanding the unprecedented size of external capital flows, monetary management was effective in ensuring a reduction in inflation and lowering expectations.