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

Monetary policySubscribe to Monetary policy

Evolving Contours of Monetary Policy

Monetary policy has emerged as an important tool of economic policy both in developed and developing economies. The monetary and financial system is far more complex today than it has been in the past. Financial intermediation has reached a high level of sophistication, which has itself become a source of concern. The impact of monetary policy action can be transmitted through a variety of channels, some of which though recognised in the past, have become more important. While the traditional issues such as the objectives of monetary policy and the possible trade-off among them remain relevant, they need to be related to the far-reaching changes in the institutional environment at home and abroad. The changing objectives of monetary policy, newly evolving instruments of monetary control and the transmission mechanism and issues related to autonomy in the pursuit of monetary policy are examined.

Time-varying Effect of Inflation Uncertainty

Inflation remains a major concern for every economy. High inflation is generally believed to be costly because it makes the price mechanism a less effective apparatus in allocating resources efficiently (Friedman 1977). One of the most remarkable macroeconomic developments over the past two decades...

RBI’s Subservience to the Government Is Systemic, Not Ideological

The autonomous functioning of the Reserve Bank of India has been, if anything, an exception rather than the rule.

On Monetary Economics

Monetary Policy in India: A Modern Macroeconomic Perspective edited by Chetan Ghate and Kenneth M Kletzer, Springer, 2016; pp xiii+652, price not indicated.

How Did Central Bank Independence Become the Norm?

Priests of Prosperity: How Central Bankers Transformed the Postcommunist World by Juliet Johnson, New Delhi: Speaking Tiger, 2016; pp xv+292, ₹995.

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.

Reflections on Analytical Issues in Monetary Policy

Analytical issues have arisen in the conduct of flexible inflation targeting as the framework of monetary policy, adopted formally by India in 2016, despite the noticeable downward drift in the inflation rate and concerns of many economists about its relevance in the light of the global financial crisis. Issues such as the framework’s rationale, the medium-term inflation target, the meaning of real interest rate in the Indian context, the realism in respect of inflation expectations and of the inferred logic of the yield curve, and the implications for economic inequalities have been pointed out.

Negative Interest Rates

A near-unprecedented turn to negative interest rates to trigger a recovery has characterised the monetary policy in several developed countries and in Europe. This is the result of a shift away from fiscal policy to an almost exclusive reliance on monetary policy, involving quantitative easing and low interest rates, in macroeconomic interventions across the globe. The failure of this macroeconomic stance has led to the phenomenon of negative rates in countries other than the United States, and the first sign of even a partial recovery in that country has been enough to set off a reversal.

Oil Price, Exchange Rate and the Indian Macroeconomy

General discussions on the Indian macroeconomy have centred on two things in the recent past: the impact of depreciation of rupee and the effects of falling world oil prices. Using the structural vector autoregressive approach, the dynamic relationship between movements in oil prices and exchange rates with macroeconomic variables like price, output, interest rate and money are investigated. Additionally, a comparative analysis is conducted to show how each of these structural shocks has historically affected price, output and exchange rate. The results show strong link among these variables. Three results have important policy implications: (i) the world price of oil has a great potential to affect India's output, (ii) targeting depreciation of rupee to expand output may not be an effective policy tool for the RBI, and (iii) variation in rupee's value can have medium- to long-term impact on world price of oil.

Economic Policy Uncertainty and Growth in India

A measure of economic policy uncertainty or EPU for India is constructed to study its impact on the economy. It is found that gross domestic product growth and fixed investment are negatively related to EPU in India. For instance, if the economic uncertainty were to decrease to the level observed in 2005, India's GDP growth would increase by 0.56%, and fixed investment growth would increase by 1.36%. Additionally, a negative correlation between the Bombay Stock Exchange index and EPU in India is observed, suggesting that increases in EPU lower expectations of future growth or increase perceived risk of listed stocks. Lastly, it is found that firm-level capital expenditure rates are lowered when EPU increases.


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