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

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Inflation Targeting as Policy Option for India

Inflation targeting may have its benefits but the timing of India’s ongoing transition to IT – an adverse domestic and global macroeconomic context – poses signifi cant risks to a successful implementation. Moreover, the evidence of IT having a positive impact comes from the pre-financial crisis era; more recent studies of the emerging market economies over a longer period show the non-IT countries growing faster than those which have adopted IT.

Managing Capital Flows, c.2010: Policy Options for India

With the emergence of a "two-speed" world in the aftermath of the 2008 crisis, financial flows are expected to flood emerging markets' shores, including those of India which has positive growth and interestrate differentials vis-à-vis the advanced countries. This article discusses existing policy options for India and concludes by emphasising the need to evolve a medium-term response strategy, one of whose elements include countercyclical fiscal responses.

Supervising the Regulators?

What specific failings, if any, of the current regulatory structure have led to the proposed creation of the Financial Stability and Development Council is a question that needs to be answered by policymakers. Institutional reform is normally triggered by the failure of an existing institution to perform an assigned task or to keep pace with changing times. Has the existing regulatory system coped poorly or not adapted to changes? Looking back, neither institutional failure nor an inability of the present structure to respond to shocks to systemic stability justifies the FSDC.

Financial Integration, Capital Controls and Monetary Independence

It has been argued for India that the increase in capital mobility has made existing controls ineffective, eroding the central bank's influence over the short-term interest rate and that it is time, therefore, to abandon the managed exchange rate regime to regain monetary control. This note shows that the "loss of monetary independence" argument lacks empirical basis. Convergence between India and the rest of the world, though increasing, is as yet incomplete. A variety of tests shows imperfect financial integration, suggesting the Indian economy to be in the intermediate stage, i e, on the transition to full capital mobility, a feature that allows an eclectic monetaryexchange rate policy combination. With no strict trade-offs between the three policy goals posited under the trilemma, there is, as yet, no compromise on monetary independence that would justify a shift towards a free float.

Capital Flows and Domestic Financial Sector in India

This paper is a preliminary analysis of the impact of capital flows upon the domestic financial sector. We find that an inflow of foreign capital has a significant impact on domestic money supply and stock market growth, liquidity and volatility. The banking sector, however, remains relatively insulated due to policy responses of the central bank and barriers to direct capital inflows into the banking system. The paper concludes with a discussion on the costs of these policies in the event of a heavy inflow of foreign capital into India.

Financial Sector and the Budget 2002-03

Strengthening the financial sector and the capital markets is among the major objectives of the finance minister's declared budget strategy. However, evaluating the proposals for the financial sector against the yardstick of this claim, it is disappointing that much-neglected aspects of financial sector reforms do not even figure in the budget.

Real Exchange Rate Stationarity in Managed Floats

The paper tests for mean-reversion in real exchange rates for India during the recent float period. Using unit root tests with improved power, we test for stationarity of the real exchange rate, using several definitions of the real exchange rate. We also conduct cointegration and variance ratio tests to complement the evidence from unit root tests. We find evidence of meanreversion in the real exchange rate series constructed with the consumer price index as deflator, as well as for a series constructed using the ratio of wholesale and consumer price indices to proxy for the shares of tradable and non-tradable goods.

Capital Account Liberalisation

The short experience with liberalisation of capital inflows documented in this paper highlights the pressures of a capital surge upon domestic monetary management. It also reveals the additional constraint of fiscal-led monetary expansion in India, which raises aggregate demand and aggravates the inflationary impact of capital inflows. These pressures complicate macroeconomic management as the only variable that can be varied in this scenario to control inflation, or adhere to a monetary target, is domestic private sector credit.

Capital Account Liberalisation

This paper documents trends in capital flows into India in a comparative perspective, examines the impact of these flows on key macroeconomic variables and discusses the implications for economic policy.

Will Interest Rate Cut Work?

Budget 2001-2002 suggests a shift towards monetary policy in reviving an economic downturn, as in advanced economies like the US and Germany. In principle, there is nothing wrong in the use of monetary policy rather than fiscal policy, as the former has shorter lags. The question however is whether the link between investment and interest rates is as tight in India. The second point is the fast disappearing role of public investment as a tool to spur private investment.

Aspects of Exchange Rate Behaviour and Management in India 1993-98

The change in regime in India from a multi-currency peg to a floating price convertibility provides sufficient motivation for a preliminary analysis of the country's exchange rate behaviour and management between 1993-99. Using international experience with floating exchange rates as a reference point, the paper examines these changes in a comparative perspective. The paper also documents the response of the central bank to exchange rate instability during this period.

Rural Bank Branches and Financial Reform

This note traces the bank branch licensing policy in India in the post-independence period, evaluates its performance and relates it to the present restructuring of the banking industry under financial reform. Within this context, the focus of the article is the future course of rural public sector banks. It offers the Indonesian transformation of Bank Rakyat Indonesia as a model relevant for the rural branches of public sector banks in India. It argues for their transformation as an alternative to closure or gradual substitution by private sector banks.


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