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

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Macroeconomic Fundamentals and Exchange Rate Dynamics in India

The present study investigates the relative importance of macro (interest rates, inflation, etc) and micro (order flows, information, etc) variables in determining the short-run exchange rate movements. Empirical analysis is based on a primary survey of the Indian foreign exchange dealers. It finds from a survey that a majority of the dealers feel short-term changes in the Indian rupee/US dollar market are basically influenced by the micro variables such as information flow, market movement, speculation, central bank intervention, etc. One of the findings of this study, which has policy implications, is that the dealers feel speculation would increase volatility, liquidity and efficiency in the market and, central bank intervention reduces volatility and market efficiency.

Monetary Policy and Operations in Countries with Surplus Liquidity

Monetary policy in most developed countries is conducted with the system being kept marginally short of liquidity. In contrast, many emerging market monetary authorities have been facing surplus liquidity due to factors such as capital inflows, privatisation programmes or fiscal surpluses. This paper provides a cross-country experience of monetary policy and operations conducted in some of these countries and attempts to draw policy inferences concerning policy stances, operating frameworks and procedures in this regard.

Stock-Flow Norms and Systemic Stability

We offer a dynamical systems translation of the Godley and Cripps (1983) framework. Stability of an economy is shown to depend on the concatenation of four parameters: a steady-state money income ratio, a speed-of-adjustment-of-assets coefficient, an inventory accumulation index, and the share of government in aggregate income.

Basel II and Bank Lending Behaviour

The new Basel accord is slated to come into effect in India around 2007 raising the question of how the revised standards will influence bank behaviour. Using a simple theoretical model, it is shown that the revised accord will result in asymmetric differences in the efficacy of monetary policy in influencing bank lending. This will, however, depend on a number of factors, including whether banks are constrained by the risk-based capital standards, the credit quality of bank assets and the relative liquidity of banks' balance sheets. The basic model is empirically explored using data on Indian commercial banks for the period 1996-2004. The analysis indicates that the effect of a contractionary monetary policy will be significantly mitigated provided the proportion of unconstrained to constrained banks in the system is significantly high.

A Review of Bank Lending to Priority and Retail Sectors

The surge in bank credit in the last couple of years has been an encouraging phenomenon in Indiaâ??s banking sector. This reflects as much the turnaround in the economy as the improved balance sheets of the banks themselves. However, though overall credit growth has been of a high order, the expansion of agricultural credit and credit to small-scale industries sector has not kept pace with it. Retail credit, which is growing from a very low base, has expanded rapidly during this period. While consumption-led growth can help improve the growth rates in the economy, it would also result in increasing risks.

Life Insurance and the Macroeconomy

It has been observed that there is a significant relationship between the demand for life insurance and various macroeconomic variables. High growth of GDP induces an economic effect through higher per capita and disposable income and savings, which in turn create a favourable market demand for life insurance. On the other hand, life insurance also provides support to the capital market and savings data pertaining to Indian life insurance and macroeconomic variables broadly indicate a close relationship and interdependence between macroeconomic variables and life insurance demand.

Universal Banking: Solution for India's Financial Challenges?

Faced with pressures of international financial liberalisation, it is natural that Indian policy-makers want intermediaries to consolidate and improve their competitive position in both domestic and global marketplaces. Acquisition of a "universal banking" structure could be perceived as a strategic reaction of certain players to these changed circumstances. In an emerging economy like India where volatility is large, emergence of universal banks can contribute to faster economic growth as it assists in strengthening the alliance between companies and banks. A movement into universality is likely to promote consolidation in a healthy manner and hence should be encouraged.

Is the Role of Banks as Financial Intermediaries Decreasing?

The capital structure of Indian corporates reflects a churning, with a preference for internal financing over external financing. This behavioural pattern is the essence of the pecking order theory. In this context, is the role of banks as financial intermediaries decreasing? This exploratory article throws up lots of questions and provides a few answers.

Financial Liberalisation in India

The Indian experience with reform in the financial sector indicates that, inter alia, there are three important outcomes of such liberalisation. First, there is increased financial fragility, which the "irrational boom" in India's stock market epitomises. Second, there is a deflationary macroeconomic stance, which adversely affects public capital formation and the objectives of promoting employment and reducing poverty. Finally, there is a credit squeeze for the commodity producing sectors and a decline in credit delivery to rural India and small-scale industry. The belief that the financial deepening that results from liberalisation would in myriad ways neutralise these effects has not been realised.

Internal Credit Rating Practices of Indian Banks

The overarching goal of the second Basel accord is aligning the capital requirements of banks with risk sensitivity. The accord emphasises the quantification of capital requirements on the basis of internal rating models. The internal credit rating models of banks are expected to produce the probability of default and loss given default to estimate the capital requirements of credit risk. This paper presents an analysis of the current status of internal credit rating practices of Indian banks. The survey reveals that the components of internal rating systems, their architecture, and operation differ substantially across banks. The range of grades and risks associated with each grade vary across banks analysed. This implies that lending decisions may vary across banks. There are differences among the rating systems of various banks. This paper presents a set of actions to improve the quality of internal rating models of Indian banks.

On Liberalising Foreign Institutional Investments

This paper critiques the approach and recommendations of the 2004 government of India expert group on foreign institutional investment flows. The groupâ??s approach raise several important analytical and policy issues. The most crucial of these relate to effects of FII flows on (a) aggregate and sectoral investment; (b) behaviour of financial, including foreign currency, markets with special reference to their volatility; and (c) efficacy of fiscal and monetary instruments in attaining the objectives of macrostabilisation and growth. The article examines the macroeconomic impact of FII flows in the light of the Indian experience, and draws some policy conclusions regarding the role of such flows. It also addresses the issue of volatility in the Indian context. It finds there is no coherent macroeconomic model behind the expert groupsâ??s analysis and recommendations; no appraisal either of the optimal scale of capital inflows or the relative merit of FII vis-Ã -vis other categories of capital receipts at the current juncture of the economy; and no examination of monetary/fiscal problems associated with FII or of the quantitative impact of such flows on investment and other macro variables.


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