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

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Beyond Melting the Pot: On the Financial Sector Blueprint

The draft report of the Committee on Financial Sector Reforms has proposed a financial sector blueprint for creation of a level playing field, introduction of missing markets, greater participation of foreign investors and consolidation of regulation of trading under one roof. While many of the recommendations have merit, the broad approach to reduce regulatory costs, overlaps, silos and gaps appears to be characterised by "melting the pot" to create a homogeneous financial system. This runs the risk of putting financial stability to strain, as also of enhancing institutional and market inefficiencies. The quest for creating more efficient and liquid markets needs to focus beyond melting the pot to addressing the core aspects of liquidity, efficiency and stability, while retaining heterogeneity.

Monetary Policy and Operations in Countries with Surplus Liquidity

Monetary policy in most developed countries is conducted with the system being kept marginally short of liquidity. In contrast, many emerging market monetary authorities have been facing surplus liquidity due to factors such as capital inflows, privatisation programmes or fiscal surpluses. This paper provides a cross-country experience of monetary policy and operations conducted in some of these countries and attempts to draw policy inferences concerning policy stances, operating frameworks and procedures in this regard.

A Rigorous Text

Macroeconomics for Developing Countries by Raghbendra Jha; 2nd ed, Routledge, 2003; pp 496 (paperback) $44.95.
MRIDUL SAGGAR Simply said, macroeconomics is the analysis of a country

Determinants of Sovereign Borrowings from IMF

The article delineates the IMF's rationale for its role in the international economy; particularly in helping those countries that are going through balance of payments crises. The authors attempt to decipher whether the actual lending pattern of the IMF conforms to this rationale. This is done in the context of panel data models for several groups of countries. There appears to be some arbitrariness in the lending pattern of the IMF.

New Monetary Transmission Channels-Role of Interest Rates and Exchange Rate in Conduct of Indian Monetary Policy

Role of Interest Rates and Exchange Rate in Conduct of Indian Monetary Policy Partha Ray Himanshu Joshi Mridul Saggar This paper explores new dimensions in the monetary transmission mechanism in the environment of liberalisation initiated in the early 1990s and in the context of growing integration of financial markets. An examination of the Chakravarty Committee paradigm in this changed milieu motivated us to see the role of two key variables in the conduct of monetary policy, viz, interest rates and exchange rates. The long-run relationship between money, prices, output, and exchange rate is examined and the impact of money market disequilibrium on interest rate is traced by testing the joint significance of the lags of disequilibrium errors. We also conduct weak and block exogenity tests for exchange rates. Interest rates and exchange rates are seen to be endogenously determined in the liberalised regime beginning 1992-93, raising the possibility of the change in transmission mechanism following the advent of financial reforms. The recent shifts in the operating procedure of monetary policy are in consonance with our findings.

Narrow Banking Theory, Evidence and Prospects in India

Prospects in India Saibal Ghosh Mridul Saggar The narrow banking proposal defining a class of safe and liquid assets (generally sovereign government securities) for investments by weak banks, backed fully by demand liabilities (generally non-interest bearing deposits) has been considered as a means of deposit protection and a possible solution to the banking problems. We seek to explain the theoretical implications of the proposal and examine its implications for the Indian public sector banks facing large non-performing loans. The evidence presented in this paper, based on published and audited annual accounts, shows that even without a directive, narrow banking on the asset side is already being practised as part of the asset-liability management by these banks. However, given the structure of deposit ownership, narrow banking in its strict sense does not afford a solution to reforming weak banks. Strictly practised narrow banking can neither guarantee deposit protection nor turn around the weak banks. On the contrary, it can expose weak banks to immense market and interest rate risks which can make the banking system vulnerable to idiosyncratic and systemic risks arising from macro-economic shocks. Considering the fact that the problem of non-performing loans is not as alarming in India as in some other emerging markets, this paper suggests a cautious Approach to strengthening the banking structure. Pitching excessively restrictive speed limits in this scenario might turn out to be counter-productive. The paper, however, recognises that some contraction in the scale of Operations of the weak banks seems to be an unavoidable by-product of measures which may be necessary to strengthen weak banks.

SCs and STs in Eastern India-Inequality and Poverty Estimates

Inequality and Poverty Estimates Mridul Saggar Indranil Pan This paper employs inequality and poverty measures to consumption expenditure data for SCs, STs, and other households in four eastern states published by NSSO, Inequality and poverty differences among SCs, STs and other households, rural-urban disparities and interstate variations in these respects are considered. The eastern region as a whole suffers from economic backwardness and large incidence of poverty and this is specially true for SCs and STs. Rural-urban disparities in consumption also exist with the urban sector better-off than the rural sector. Also, the SCs were found to be comparatively better-off than the STs, However, the generally held view that large inequalities exist among SCs and STs is ill-founded. State level comparison shows Assam to be performing better than the others, with lower poverty levels and more egalitarian distribution of consumption.

European Monetary Integration-Can It Be Resuscitated

Can It Be Resuscitated?
Mridul Saggar The currency instability of September notwithstanding, it would be wrong to start composing requiems for European integration just as it would be unrealistic to hope that all the members of the EC will quickly return to the path charted by the Delors Report and the Maastricht treaty. European integration can be best resuscitated if the differences among the member countries are acknowledged and a transparent route of 'two-speed Europe' is followed.

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