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

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Oil Price, Exchange Rate and the Indian Macroeconomy

General discussions on the Indian macroeconomy have centred on two things in the recent past: the impact of depreciation of rupee and the effects of falling world oil prices. Using the structural vector autoregressive approach, the dynamic relationship between movements in oil prices and exchange rates with macroeconomic variables like price, output, interest rate and money are investigated. Additionally, a comparative analysis is conducted to show how each of these structural shocks has historically affected price, output and exchange rate. The results show strong link among these variables. Three results have important policy implications: (i) the world price of oil has a great potential to affect India's output, (ii) targeting depreciation of rupee to expand output may not be an effective policy tool for the RBI, and (iii) variation in rupee's value can have medium- to long-term impact on world price of oil.

Economic Policy Uncertainty and Growth in India

A measure of economic policy uncertainty or EPU for India is constructed to study its impact on the economy. It is found that gross domestic product growth and fixed investment are negatively related to EPU in India. For instance, if the economic uncertainty were to decrease to the level observed in 2005, India's GDP growth would increase by 0.56%, and fixed investment growth would increase by 1.36%. Additionally, a negative correlation between the Bombay Stock Exchange index and EPU in India is observed, suggesting that increases in EPU lower expectations of future growth or increase perceived risk of listed stocks. Lastly, it is found that firm-level capital expenditure rates are lowered when EPU increases.

Contemporary Macroeconomic Analysis

Looking Back at Macroeconomics 101: A Ringside View of the Global Financial Crisis from Asia in Real Time by Alok Sheel; Academic Foundation, 2015; pp 422, ₹1,295.

Financial Sector Reforms

Unified Financial Code: Is India Ready? A Critique on the Financial Sector Legislative Reforms Commission Report by S S Tarapore; Gurgaon: LexisNexis, 2015; pp xii+166, ₹295.

Procyclical Credit Growth and Bank NPAs in India

Despite recent monetary policy accommodation, bank credit growth continues to decelerate in India, partly due to huge non-performing asset overhangs in banks. This paper explores various issues related to surging NPAs in banks and observes that excessive credit growth in the past is a major reason that has led to current NPAs. Other factors such as contemporary economic conditions, capital adequacy and overall levels of efficiency of the banks have also affected the incidence of NPAs. For promoting financial stability and enhancing monetary policy effectiveness, it is suggested that macro-prudential aspects such as counter-cyclical capital buffer and dynamic provisioning need to be strengthened. There is also a need to explore if corporate governance concerns could be instrumental in adversely impacting the loan book of state-owned banks.

Capital Account Management in India

India has been subject to capricious capital flows since its integration with the global capital markets in the early 1990s. In a bid to balance diverse objectives, India, like many other emerging markets, has resorted to active management of various types of capital flows. This paper finds that while the calibrated liberalisation approach resulted in altering the composition of capital flows towards more stable flows, and has helped India to negotiate the "Trilemma," the use of sporadic capital account management measures in the face of surge or stop of capital flows has not been very effective in achieving their objectives of reducing external vulnerability or mitigating macro-prudential risks.

Monetary Policy Dilemmas at the Current Juncture

Monetary policies in advanced economies and emerging markets face quite different challenges at the current juncture. In the advanced countries, current dilemmas derive from the normalisation of unconventional monetary policies. The short-term dilemma is to determine when to start exiting extraordinary policies and selecting appropriate tools, as conventional tools may not be very relevant during this phase. The medium- to long-term challenges relate to the sequencing, pace and mechanics of normalisation. Monetary policy in emerging markets needs to cope with the familiar dilemmas of fiscal dominance, the growth-inflation trade-off and the "impossible trinity." With fiscal parameters in control, and food and commodity prices subdued, the chief dilemma currently confronting emerging markets involves a trade-off between targeting divergent domestic and external cycles. Although they are now better placed to absorb a sudden stop, the impact is likely to be differential, with those with weaker macroeconomic parameters suffering greater pain.

Dynamic Stochastic General Equilibrium Modelling

In recent years Dynamic Stochastic General Equilibrium models have come to play an increasing role in central banks, as an aid in the formulation of monetary policy (and increasingly after the global crisis, for maintaining financial stability). DSGE models, it is claimed, are less a-theoretic than other widely used models such as VAR, or dynamic factor models. As the models are "structural," they are supposed to be immune to the Lucas Critique, and thus can be "taken to the data" in a meaningful way. However, a major feature of these models is that their theoretical underpinnings lie in what has now come to be called as the New Consensus Macroeconomics. Using the prototype real business cycle model as an illustration, this paper brings out the econometric structure underpinning such models. A detailed analytical critique is also presented together with some promising leads for future research.

The New Keynesian Paradigm of Monetary Policy

While Keynes was sceptical of the efficacy of monetary policy , the current mainstream macroeconomic consensus , "New" Keynesian macroeconomics , accords it primacy in the process of maintaining both price and output stability. This consensus depends on three relationships: demand is inversely dependent on the interest rate, inflation is positively related to the output gap and the central bank can control interest rates to achieve an optimum combination of price and output. This paper presents a theoretical critique of this consensus from an "old" Keynesian perspective since Keynes had raised fundamental objections to each of the three relationships .

Financial Reforms in an Endogenous Money Economy

An examination of the Reserve Bank of India's monetary policy leaves little doubt that India can be suitably characterised as an endogenous money economy. In an endogenous money environment, financial reforms will prove ineffective in stimulating credit supply to large commercial borrowers. They may, however, prove counterproductive by sharpening the credit constraints faced by agricultural and other petty producers in the economy.


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