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

Articles by Anuradha PatnaikSubscribe to Anuradha Patnaik

Monetary Policy Announcements of the Reserve Bank of India and the Role of Information Shock

Inflation-targeting central banks supplement their monetary policy announcements with communication in the form of speeches and publication of text documents. The markets react to the surprise component of the rate action and the communication by the central bank. Thus, the monetary surprise derived from the reaction of markets, following a policy announcement, is agglutinated with the central bank information. The present paper attempts to identify and examine the efficacy of such an information shock in influencing the inflation expectations of households, interest rate expectations of agents, output and inflation.

Disaggregate Food Inflation in India

Inflation may vary across space and commodities due to differences in region-specific or idiosyncratic factors such as climate, local culture, and the existing institutional set-up. These factors cause disaggregate, or regional, inflation, which in turn coalesces into aggregate inflation. Food inflation is a typical example. Spatial factors and rainfall are the most important determinants of disaggregate food inflation. Local inflation differs from aggregate inflation; the rate of inflation varies by city and commodity; and the determinants of rural and urban inflation are different. In addition to demand management policies, aggressive supply-side policies are the need of the hour.

CPI to WPI Causation

The causal relationship between consumer price index and wholesale price index has been the focus of several econometric studies. The CPI could drive the WPI when producers follow mark-up pricing and when wages increase. These could be due to supply shocks that lead producers to hike prices, thereby also increasing consumer prices, which in turn could lead trade unions to demand higher wages--leading to higher WPI. Alternately if consumer expenditure rises in response to a positive income shock--increasing the demand for goods--it can lead to a rise in the derived demand for labour and subsequently wages. The present study attempts to (i) empirically test for the causal influence of CPI on WPI in the frequency domain, and (ii) test whether the observed CPI to WPI causation is demand-driven or driven by supply shocks.

Monetary Policy

In the annual monetary policy statement the Reserve Bank of India (RBI) was prudent in not touching the key interest rate. An increase in the interest rates would have triggered (a) a rise in the exchange rates, and (b) a fall in the stock prices.

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