Monetary Policy in India: A Modern Macroeconomic Perspective edited by Chetan Ghate and Kenneth M Kletzer, Springer, 2016; pp xiii+652, price not indicated.
The idea of “bail-in” in cases of serious banking instability has been widely discussed in India ever since the introduction of the Financial Resolution and Deposit Insurance Bill. Given the large non-performing loans of public sector banks, the Government of India and the Reserve Bank of India as the regulatory authority have to quickly act to ensure that public confidence in the soundness of commercial banks is not breached. In this context, three approaches are explored that could be adopted either individually or in a variety of combinations in different proportions essentially to secure banking stability. The bail-in idea should not be considered except in extreme conditions of large financial stress. The idea could be tried even before the extreme situation arises with provision of incentives.
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.
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.
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.
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.
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.
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.
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.
In spite of their distinct organisational structure and banking philosophy based on mutuality, there is scant evidence on efficiency of cooperative banks. The efficiency of district central cooperative banks in India is investigated by constructing a panel of 297 cooperative banks over the period 2002–14. Using parametric and non-parametric frontier analysis, it is found that efficiency estimates vary depending upon whether advances or investments of DCCBs are used as output. The efficiency of cooperative banking is mapped, and shows considerable variation in efficiency of DCCBs across states. The findings suggest the need for innovative strategies to improve cooperative banking efficiency in the country.
