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

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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.

Appetite for Official Reserves

There is a strong nexus between the level of reserves, frequency of intervention, and exchange rate variability. Given the current exchange rate arrangements, there is a mandate to accumulate reserves in line with other developments such as import growth, growth in short-term external debt, and so on. The Reserve Bank of India seems to have no option, especially in times of capital flight, than to allow the exchange rate to absorb market pressure if the volume of reserves held is not adequate. This indicates a limited scope for using other instruments. The objective of accumulating additional reserves seems to override the ambition of exchange rate stability when there is a limit on the capacity to intervene imposed by the reserve shortfall. Therefore, reserves matter in times of crisis.

Long-run Determinants of Sovereign Bond Yields

Keynes’s supposition of short-term interest rates as the key driver of long-term government bond yields is investigated for India, after controlling for various key economic factors. It is seen that long-term interest rates of Indian government bonds are positively associated with the short-term interest rates of Treasury Bills. Higher long-term interest rates on IGBs are influenced by higher short-term interest rates, higher rates of inflation, a faster pace of industrial production and higher fiscal deficit (and vice versa). The bond market was disrupted during 2013 when yields rose sharply in India. Incorporating this structural break improved our findings.

The Story of Currency in Circulation

The impact of demonetisation on the movement of currency in circulation in India over time is examined. Four different models of currency in circulation are used to estimate these models using weekly data from April 1992 to October 2016. An analysis of out-of-sample forecast performance of these models prior to demonetisation reveals that the series could be forecast well before this event. Out-of-sample forecast errors of these models during the post-demonetisation period are, therefore, interpreted as shocks due to demonetisation. As far as weekly growth rates of the series are concerned, we observe no major change in intra-month seasonality in currency in circulation once the shock due to demonetisation mitigated.

‘Riskless Capitalism’ in India

A study of the financial processes underlying India’s high-growth trajectory of the 2000s and its relationship with “riskless capitalism,” a term first used by Raghuram Rajan in November 2014, finds that the Indian growth story cannot be over-simplistically explained as a result of “market-oriented” reforms. Public sector bank credit-financed investments, particularly in the infrastructure sector, played a significant role in sustaining growth, most crucially after the global economic crisis. Such a growth trajectory, however, proved to be unsustainable with the expansionary phase coming to an end in 2011–12 and bad loans piling up in the banking system.

Public Sector Bank Mergers

The slowdown in the economy and the resultant rise in bad loans have led to criticism of public sector banks and questioning of their raison d’être. While there is a rush to find a quick solution by merging PSBs, it would be wise to examine the ground realities closely. India needs a mix of efficiently run PSBs and aggressive private banks to achieve growth and development along with social justice.

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.

Public Bank Privatisation in a Post-truth World

The Narendra Modi government appears to have decided to privatise public sector banks (PSBs). Preparations are underway with arguments being marshalled that “there is no alternative” to privatisation. Noises of this kind have emanated often from the Reserve Bank of India (RBI) and government...

A Critique of RBI’s Trend and Progress of Banking in India

Over the last three years, the scope of the Reserve Bank of India’s Report on Trend and Progress of Banking in India has drastically come down. Information on important aspects of the operations of commercial banks and other financial institutions is now not presented in the report. A plea is made to restore the contents of the erstwhile reports and enhance the utility of the publication with additional data fromRBI’s existing database.

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.


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