This document outlines an analytical framework for implementing flexible inflation targeting in India. It provides context on India's monetary policy and inflation trends since 2000. The key points are:
1. India experienced three phases of inflation since 2000 - moderate inflation and strong growth from 2000-2008, higher inflation from 2008-2013, and lower inflation since 2013.
2. During 2000-2008, inflation was low and stable despite supply shocks, due to weak demand and administered fuel prices. However, inflation breached targets in 2008 due to high global commodity prices and overheating concerns.
3. The document proposes using a Quarterly Projection Model within a flexible inflation targeting framework to help the Reserve Bank of India respond optimally
This document summarizes a study examining the impact of international capital flows on the Indian stock market. The study uses daily data from 2005-2014 on the Sensex and Nifty stock indices and foreign institutional investment (FII) flows. It performs various econometric analyses including Granger causality tests and GARCH modeling to study the impact on returns and volatility. The results show no evidence of causality from capital flows to stock returns, but do find capital flows help explain volatility in the stock market, with a significant asymmetric effect of capital outflows. Robustness checks using different sub-periods are also conducted.
The bond market plays an important role as an alternative source of financing in the current economic growth. Indonesian government funding through the domestic bond market continues to grow, indicated by the issuance of bonds which tends to increase over time.
International Journal of Humanities and Social Science Invention (IJHSSI)inventionjournals
1) The document analyzes the impact of the 2008 global financial crisis on the Indian banking sector. It discusses three main transmission channels through which the crisis impacted India: the finance channel, real economy channel, and confidence channel.
2) In response, the Reserve Bank of India took monetary policy actions like cutting reserve requirements to increase liquidity. It also liberalized rules on foreign capital inflows.
3) The document finds that overall, the Indian banking sector remained resilient during the crisis. Public and private sector banks saw small increases in profits. Non-performing assets declined for public banks but rose slightly for private and foreign banks. Private banks improved several performance metrics like interest income and returns on assets. Thus,
Influence of foreign portfolio investment on stock market indicatorsIAEME Publication
This document summarizes an article from the International Journal of Management that examines the influence of foreign portfolio investment on stock market indicators in India. It begins with background on foreign institutional investors and regulations governing foreign investment in Indian markets. It then discusses the relationship between foreign portfolio flows and stock market performance, noting that foreign flows tend to influence market sentiment and indices in the short-term. The article aims to analyze the degree to which foreign investment impacts specific stock market indicators like the price-earnings ratio, dividend yield, and book value of the Nifty index over time. It uses data on foreign investments and market movements from 2003 to 2013 to assess the relationship and whether foreign influences are sustained.
1) The document discusses India's current macroeconomic challenges from the perspective of the Reserve Bank of India.
2) It outlines three main challenges: managing growth-inflation dynamics, mitigating external sector vulnerabilities, and managing the political economy of fiscal consolidation.
3) On growth-inflation dynamics, private investment and consumption have declined sharply, slowing growth while inflation has remained elevated due to food and commodity prices and wage pressures. The Reserve Bank has raised interest rates aggressively to curb inflation.
The Reserve Bank of India's Monetary Policy Statement for 2011-12 outlines the domestic and global economic conditions shaping India's monetary policy for the year. Key points include:
1) Global commodity prices have surged, posing inflation risks for India as higher input costs are passed through to consumers.
2) Domestically, inflation significantly overshot targets last year, raising concerns over inflation expectations.
3) While growth remains strong, some moderation is expected which could help contain inflation but fiscal risks remain from high subsidies.
4) The monetary policy aims to bring down elevated inflation to support long-term growth, even if it means short-term costs to growth.
Measuring the volatility of foreign exchange market in indiaAlexander Decker
This document summarizes a research study measuring the volatility of foreign exchange rates in the Indian market. The study analyzes daily exchange rate data for the US dollar, euro, and Japanese yen against the Indian rupee over time. The objectives are to measure the volatility of these currencies, examine their co-movement, analyze the volatility distribution, and measure skewness and kurtosis. Hypotheses are tested regarding the normality of volatility distributions. The results could help manage foreign exchange risk more effectively in India's increasingly globalized economy.
- Global equity markets stabilized as comments from European central banks supported an accommodative monetary policy stance. However, emerging markets underperformed developed markets.
- In the US, a stronger-than-expected jobs report suggested the Fed will taper asset purchases later this year, while in Europe, both the ECB and BoE kept rates unchanged and signaled easy monetary policies.
- In Asia, Chinese stocks rallied as liquidity concerns eased, while markets in South Korea and Taiwan fell; manufacturing PMIs in China were lackluster.
This document summarizes a study examining the impact of international capital flows on the Indian stock market. The study uses daily data from 2005-2014 on the Sensex and Nifty stock indices and foreign institutional investment (FII) flows. It performs various econometric analyses including Granger causality tests and GARCH modeling to study the impact on returns and volatility. The results show no evidence of causality from capital flows to stock returns, but do find capital flows help explain volatility in the stock market, with a significant asymmetric effect of capital outflows. Robustness checks using different sub-periods are also conducted.
The bond market plays an important role as an alternative source of financing in the current economic growth. Indonesian government funding through the domestic bond market continues to grow, indicated by the issuance of bonds which tends to increase over time.
International Journal of Humanities and Social Science Invention (IJHSSI)inventionjournals
1) The document analyzes the impact of the 2008 global financial crisis on the Indian banking sector. It discusses three main transmission channels through which the crisis impacted India: the finance channel, real economy channel, and confidence channel.
2) In response, the Reserve Bank of India took monetary policy actions like cutting reserve requirements to increase liquidity. It also liberalized rules on foreign capital inflows.
3) The document finds that overall, the Indian banking sector remained resilient during the crisis. Public and private sector banks saw small increases in profits. Non-performing assets declined for public banks but rose slightly for private and foreign banks. Private banks improved several performance metrics like interest income and returns on assets. Thus,
Influence of foreign portfolio investment on stock market indicatorsIAEME Publication
This document summarizes an article from the International Journal of Management that examines the influence of foreign portfolio investment on stock market indicators in India. It begins with background on foreign institutional investors and regulations governing foreign investment in Indian markets. It then discusses the relationship between foreign portfolio flows and stock market performance, noting that foreign flows tend to influence market sentiment and indices in the short-term. The article aims to analyze the degree to which foreign investment impacts specific stock market indicators like the price-earnings ratio, dividend yield, and book value of the Nifty index over time. It uses data on foreign investments and market movements from 2003 to 2013 to assess the relationship and whether foreign influences are sustained.
1) The document discusses India's current macroeconomic challenges from the perspective of the Reserve Bank of India.
2) It outlines three main challenges: managing growth-inflation dynamics, mitigating external sector vulnerabilities, and managing the political economy of fiscal consolidation.
3) On growth-inflation dynamics, private investment and consumption have declined sharply, slowing growth while inflation has remained elevated due to food and commodity prices and wage pressures. The Reserve Bank has raised interest rates aggressively to curb inflation.
The Reserve Bank of India's Monetary Policy Statement for 2011-12 outlines the domestic and global economic conditions shaping India's monetary policy for the year. Key points include:
1) Global commodity prices have surged, posing inflation risks for India as higher input costs are passed through to consumers.
2) Domestically, inflation significantly overshot targets last year, raising concerns over inflation expectations.
3) While growth remains strong, some moderation is expected which could help contain inflation but fiscal risks remain from high subsidies.
4) The monetary policy aims to bring down elevated inflation to support long-term growth, even if it means short-term costs to growth.
Measuring the volatility of foreign exchange market in indiaAlexander Decker
This document summarizes a research study measuring the volatility of foreign exchange rates in the Indian market. The study analyzes daily exchange rate data for the US dollar, euro, and Japanese yen against the Indian rupee over time. The objectives are to measure the volatility of these currencies, examine their co-movement, analyze the volatility distribution, and measure skewness and kurtosis. Hypotheses are tested regarding the normality of volatility distributions. The results could help manage foreign exchange risk more effectively in India's increasingly globalized economy.
- Global equity markets stabilized as comments from European central banks supported an accommodative monetary policy stance. However, emerging markets underperformed developed markets.
- In the US, a stronger-than-expected jobs report suggested the Fed will taper asset purchases later this year, while in Europe, both the ECB and BoE kept rates unchanged and signaled easy monetary policies.
- In Asia, Chinese stocks rallied as liquidity concerns eased, while markets in South Korea and Taiwan fell; manufacturing PMIs in China were lackluster.
Monthly market outlook (July 2021) | ICICI Prudential Mutual Fundiciciprumf
Valuations are not cheap but the business cycle remains in the nascent phase. Read our Monthly Market Outlook for July 2021 to understand more about Equity Markets and Fixed Income Markets.
DERIVATIVES MARKET OPERATIONS AND HEDGING STRATEGIESSajna Nadigadda
The document is a study report submitted by N. Sajana to Prof. G. Shiva Prasad as part of an internship program. It provides an overview of the derivatives market and hedging strategies in India with a focus on Indiabulls Securities Ltd. The report covers the capital market structure in India, defines derivatives and various hedging strategies. It also analyzes reasons for the decline in crude oil prices globally and provides an overview of Indiabulls Securities Ltd, its objectives, products, projects and awards received.
Monthly review of key market segments within India including Equity (Domestic and International), Fixed Income, Currency, Economic Indicators, Mutual Funds & Recommended Portfolios (India).
Study of volatility_and_its_factors_on_indian_stock_marketKarthik Juturu
The document discusses factors that contribute to volatility in the Indian stock market. It identifies several macroeconomic variables like geopolitical tensions, energy prices, inflation, interest rates, and government/RBI policies that create uncertainty and affect company valuations. It also notes that volatility has increased in recent years due to factors like increased financial leverage of companies. The main objective is to analyze the causes of stock market volatility in India and understand how the market reacts to different influences.
The document provides an overview of the Indian rupee (INR) currency over time, focusing on factors that affect its value and major currency crises in India. It discusses key factors like the balance of payments, fiscal deficits, economic reforms, political instability, and special events. Major currency crises discussed include the 1966 devaluation crisis brought on by war spending and drought, and the 1991 crisis where foreign reserves dropped dangerously low, forcing the government to airlift gold reserves and seek an IMF loan while implementing economic reforms to stabilize the currency. The document analyzes the INR's decline since independence and effects of the 1991 liberalization policies.
We believe valuations are not cheap, but business cycle remains in the nascent stage. Prefer middle-of-the-road approach and recommend investing in schemes with higher flexibility.
Invest in products that make up your daily routine and aim to be a part of their growth with ICICI Prudential FMCG ETF. Start investing today and include diverse and innovative companies to your portfolio.
Hurry! NFO closes on 2nd August 2021.
Know more at https://bit.ly/3zfR0f8
To analyze the stock market, one must first analyze the global economy and how it affects the Indian economy. Then it is important to analyze key sectors and economic indicators like GDP growth, inflation, interest rates, forex reserves, and IIP data. Finally, one can analyze specific companies and stocks. Some important factors to examine are monetary policies, fiscal policies, FDI, FII flows, and the rupee-dollar exchange rate. Regular analysis of macroeconomic trends helps provide context for movements in the stock market.
fundamental analysis for axis bank in banking industryswapnilgangele
The document discusses various aspects of the banking industry in India including economic features, liquidity controls, demand for credit, barriers to entry, and the impact of the global financial crisis in 2008-2009. It provides data on key metrics for foreign and nationalized banks over several quarters from 2007-2008 to 2008-2009 showing growth in areas like deposits, advances, and capital despite challenges from higher NPAs and debt restructuring. The conclusion notes upcoming issues and challenges for Indian banks around risk management, consolidation, technology, reforms, and skilled manpower.
The Indian financial system underwent reforms in the early 1990s in response to a crisis where foreign exchange reserves had fallen dangerously low. The reforms led to high economic growth while maintaining price and financial stability. Reforms deregulated and liberalized the system, promoting greater competition and efficiency. The objectives were to create an efficient, competitive, and stable financial sector that could stimulate growth through improved resource allocation. This involved developing money, government securities, and foreign exchange markets to aid monetary policy transmission.
The Nikkei 225 is a stock market index for the Tokyo Stock Exchange that tracks the performance of Japan's top 225 blue-chip companies. It uses a price-weighted average methodology and covers approximately 50% of the total market capitalization of the TSE. Some of the top components include Toyota, NTT Docomo, and Mitsubishi UFJ Financial Group. The index is reviewed annually and components may be added or removed based on liquidity and representation of the market. It has been influenced by global economic factors and periods of Japanese economic growth and decline over the decades.
This document provides an analysis of HDFC Bank from a macroeconomic and fundamental perspective. It begins with an introduction and scope before analyzing the macroeconomic outlook in India, including economic growth projections, inflation rates, and issues concerning the banking industry. Part 1 discusses the international linkages of the Indian economy and analyzes factors like GDP growth, industrial growth, and inflation projections. It notes the banking industry will be affected by macroeconomic changes. Part 2 examines the banking industry in India, including the role of public and private sector banks and the path forward for the industry. The document aims to comprehensively analyze HDFC Bank within the contexts of the macroeconomic environment and banking industry in India.
- Indian markets fell for a third straight session yesterday to their lowest close in more than a week as concerns over the country's finances hit sectors sensitive to growth such as banking and IT stocks. The finance minister set modest targets for reducing the fiscal deficit and provided no major reforms, dampening sentiment.
- Asian stocks were mostly lower today with Chinese banks and property stocks declining sharply. The Indian market is expected to open weak but see some recovery as markets have declined sharply since the budget.
- In other news, gems and jewelry exports declined 39% in February while the power ministry will seek a 19% import duty on some power equipment.
RBI's Mid quarter Policy. No Loan against Gold, Raising Provisions for NPA, and trying to cut the leverages in the Banking system.
Why every 45 days Dr Suba Rao has to walk to the Podium..?
Fiis invest nearly rs 9,600 cr in indianYasha Singh
Foreign institutional investors poured nearly Rs 9,600 crore into Indian equities in March, the highest monthly inflow so far in 2014, on hopes of a stable government after the upcoming general elections. FIIs bought shares worth Rs 59,296 crore and sold stocks worth Rs 49,699 crore, resulting in a net equity inflow of Rs 9,597 crore. FIIs also invested Rs 12,816 crore in Indian debt markets. Analysts believe FIIs are betting on the Bharatiya Janata Party-led government under Narendra Modi being re-elected.
The document provides information on two major stock exchanges in India:
1) The Bombay Stock Exchange (BSE) is the oldest stock exchange in Asia, located in Mumbai. It has over 5,112 listed companies and is the 6th largest exchange in Asia.
2) The National Stock Exchange (NSE) was established in 1992 to provide nationwide trading. It launched two indices, Nifty 50 and NSE Midcap, to track movements in the stock market. Nifty 50 tracks the performance of 50 large companies and NSE Midcap tracks mid-sized companies.
Mr. Tohru Sasaki, Managing Director and Head of Japan Rates and FX Research, JP Morgan was one of the keynote speakers at the Asia Business Forum, organised by London Business School's Asia Club, on 27 April 2013. He spoke about the economic policies advocated by Japan's Prime Minister and the implication that they have to the Asian economy.
Find out more about the Asia Club:
Website: https://clubs.london.edu/asiaclub
Facebook: https://www.facebook.com/LBS.AsiaClub
Twitter: https://twitter.com/LBSAsiaClub
This document provides an overview of the Indian financial sector and analyzes the impact of the global financial crisis. It discusses how India's gradual approach to financial liberalization and prudent regulatory policies helped limit the direct impact of the crisis. While growth declined, the financial sector was stabilized through liquidity measures and policy responses that targeted support for SMEs. Looking ahead, the proposed Basel III capital and liquidity standards will significantly impact Indian banks, with some norms posing more of a challenge to meet than others.
The document summarizes the evolution of India's financial sector over three periods from 1950 to 2015. The first period from 1950-1960 saw an underdeveloped and unstable banking system under laissez faire. From 1970-1980 the government took control and financial development expanded across the country, though it was accompanied by financial repression. Since the 1990s reforms have gradually liberalized and deepened the financial sector. Banking has moved towards greater competition and modernization, insurance was opened to private players, and capital markets have developed unevenly across segments. Overall the financial system has progressed significantly but still has room to grow in areas like insurance coverage and debt market development.
Monthly market outlook (July 2021) | ICICI Prudential Mutual Fundiciciprumf
Valuations are not cheap but the business cycle remains in the nascent phase. Read our Monthly Market Outlook for July 2021 to understand more about Equity Markets and Fixed Income Markets.
DERIVATIVES MARKET OPERATIONS AND HEDGING STRATEGIESSajna Nadigadda
The document is a study report submitted by N. Sajana to Prof. G. Shiva Prasad as part of an internship program. It provides an overview of the derivatives market and hedging strategies in India with a focus on Indiabulls Securities Ltd. The report covers the capital market structure in India, defines derivatives and various hedging strategies. It also analyzes reasons for the decline in crude oil prices globally and provides an overview of Indiabulls Securities Ltd, its objectives, products, projects and awards received.
Monthly review of key market segments within India including Equity (Domestic and International), Fixed Income, Currency, Economic Indicators, Mutual Funds & Recommended Portfolios (India).
Study of volatility_and_its_factors_on_indian_stock_marketKarthik Juturu
The document discusses factors that contribute to volatility in the Indian stock market. It identifies several macroeconomic variables like geopolitical tensions, energy prices, inflation, interest rates, and government/RBI policies that create uncertainty and affect company valuations. It also notes that volatility has increased in recent years due to factors like increased financial leverage of companies. The main objective is to analyze the causes of stock market volatility in India and understand how the market reacts to different influences.
The document provides an overview of the Indian rupee (INR) currency over time, focusing on factors that affect its value and major currency crises in India. It discusses key factors like the balance of payments, fiscal deficits, economic reforms, political instability, and special events. Major currency crises discussed include the 1966 devaluation crisis brought on by war spending and drought, and the 1991 crisis where foreign reserves dropped dangerously low, forcing the government to airlift gold reserves and seek an IMF loan while implementing economic reforms to stabilize the currency. The document analyzes the INR's decline since independence and effects of the 1991 liberalization policies.
We believe valuations are not cheap, but business cycle remains in the nascent stage. Prefer middle-of-the-road approach and recommend investing in schemes with higher flexibility.
Invest in products that make up your daily routine and aim to be a part of their growth with ICICI Prudential FMCG ETF. Start investing today and include diverse and innovative companies to your portfolio.
Hurry! NFO closes on 2nd August 2021.
Know more at https://bit.ly/3zfR0f8
To analyze the stock market, one must first analyze the global economy and how it affects the Indian economy. Then it is important to analyze key sectors and economic indicators like GDP growth, inflation, interest rates, forex reserves, and IIP data. Finally, one can analyze specific companies and stocks. Some important factors to examine are monetary policies, fiscal policies, FDI, FII flows, and the rupee-dollar exchange rate. Regular analysis of macroeconomic trends helps provide context for movements in the stock market.
fundamental analysis for axis bank in banking industryswapnilgangele
The document discusses various aspects of the banking industry in India including economic features, liquidity controls, demand for credit, barriers to entry, and the impact of the global financial crisis in 2008-2009. It provides data on key metrics for foreign and nationalized banks over several quarters from 2007-2008 to 2008-2009 showing growth in areas like deposits, advances, and capital despite challenges from higher NPAs and debt restructuring. The conclusion notes upcoming issues and challenges for Indian banks around risk management, consolidation, technology, reforms, and skilled manpower.
The Indian financial system underwent reforms in the early 1990s in response to a crisis where foreign exchange reserves had fallen dangerously low. The reforms led to high economic growth while maintaining price and financial stability. Reforms deregulated and liberalized the system, promoting greater competition and efficiency. The objectives were to create an efficient, competitive, and stable financial sector that could stimulate growth through improved resource allocation. This involved developing money, government securities, and foreign exchange markets to aid monetary policy transmission.
The Nikkei 225 is a stock market index for the Tokyo Stock Exchange that tracks the performance of Japan's top 225 blue-chip companies. It uses a price-weighted average methodology and covers approximately 50% of the total market capitalization of the TSE. Some of the top components include Toyota, NTT Docomo, and Mitsubishi UFJ Financial Group. The index is reviewed annually and components may be added or removed based on liquidity and representation of the market. It has been influenced by global economic factors and periods of Japanese economic growth and decline over the decades.
This document provides an analysis of HDFC Bank from a macroeconomic and fundamental perspective. It begins with an introduction and scope before analyzing the macroeconomic outlook in India, including economic growth projections, inflation rates, and issues concerning the banking industry. Part 1 discusses the international linkages of the Indian economy and analyzes factors like GDP growth, industrial growth, and inflation projections. It notes the banking industry will be affected by macroeconomic changes. Part 2 examines the banking industry in India, including the role of public and private sector banks and the path forward for the industry. The document aims to comprehensively analyze HDFC Bank within the contexts of the macroeconomic environment and banking industry in India.
- Indian markets fell for a third straight session yesterday to their lowest close in more than a week as concerns over the country's finances hit sectors sensitive to growth such as banking and IT stocks. The finance minister set modest targets for reducing the fiscal deficit and provided no major reforms, dampening sentiment.
- Asian stocks were mostly lower today with Chinese banks and property stocks declining sharply. The Indian market is expected to open weak but see some recovery as markets have declined sharply since the budget.
- In other news, gems and jewelry exports declined 39% in February while the power ministry will seek a 19% import duty on some power equipment.
RBI's Mid quarter Policy. No Loan against Gold, Raising Provisions for NPA, and trying to cut the leverages in the Banking system.
Why every 45 days Dr Suba Rao has to walk to the Podium..?
Fiis invest nearly rs 9,600 cr in indianYasha Singh
Foreign institutional investors poured nearly Rs 9,600 crore into Indian equities in March, the highest monthly inflow so far in 2014, on hopes of a stable government after the upcoming general elections. FIIs bought shares worth Rs 59,296 crore and sold stocks worth Rs 49,699 crore, resulting in a net equity inflow of Rs 9,597 crore. FIIs also invested Rs 12,816 crore in Indian debt markets. Analysts believe FIIs are betting on the Bharatiya Janata Party-led government under Narendra Modi being re-elected.
The document provides information on two major stock exchanges in India:
1) The Bombay Stock Exchange (BSE) is the oldest stock exchange in Asia, located in Mumbai. It has over 5,112 listed companies and is the 6th largest exchange in Asia.
2) The National Stock Exchange (NSE) was established in 1992 to provide nationwide trading. It launched two indices, Nifty 50 and NSE Midcap, to track movements in the stock market. Nifty 50 tracks the performance of 50 large companies and NSE Midcap tracks mid-sized companies.
Mr. Tohru Sasaki, Managing Director and Head of Japan Rates and FX Research, JP Morgan was one of the keynote speakers at the Asia Business Forum, organised by London Business School's Asia Club, on 27 April 2013. He spoke about the economic policies advocated by Japan's Prime Minister and the implication that they have to the Asian economy.
Find out more about the Asia Club:
Website: https://clubs.london.edu/asiaclub
Facebook: https://www.facebook.com/LBS.AsiaClub
Twitter: https://twitter.com/LBSAsiaClub
This document provides an overview of the Indian financial sector and analyzes the impact of the global financial crisis. It discusses how India's gradual approach to financial liberalization and prudent regulatory policies helped limit the direct impact of the crisis. While growth declined, the financial sector was stabilized through liquidity measures and policy responses that targeted support for SMEs. Looking ahead, the proposed Basel III capital and liquidity standards will significantly impact Indian banks, with some norms posing more of a challenge to meet than others.
The document summarizes the evolution of India's financial sector over three periods from 1950 to 2015. The first period from 1950-1960 saw an underdeveloped and unstable banking system under laissez faire. From 1970-1980 the government took control and financial development expanded across the country, though it was accompanied by financial repression. Since the 1990s reforms have gradually liberalized and deepened the financial sector. Banking has moved towards greater competition and modernization, insurance was opened to private players, and capital markets have developed unevenly across segments. Overall the financial system has progressed significantly but still has room to grow in areas like insurance coverage and debt market development.
THE IMPACT OF CAPITAL ADEQUACY RATIO UNDER BASE II ON THE DETERMINANTS OF PRO...IAEME Publication
This document analyzes the impact of capital adequacy ratio (CAR) under Basel II on the profitability ratios of Punjab National Bank from 2009-2014. It finds that most profitability ratios like return on equity, return on assets, and dividend payout ratio showed a decreasing trend during this period while CAR remained relatively stable. Correlation and regression analysis showed a positive relationship between CAR and profitability ratios except earnings per share. The study aims to establish how CAR affected various determinants of profitability for Punjab National Bank during the Basel II implementation period.
THE IMPACT OF CAPITAL ADEQUACY RATIO UNDER BASEL II ON THE DETERMINANTS OF PR...IAEME Publication
Risks to a bank are responsible for an adverse impact on the capital and
profitability. The profitability ratios play an important role in deciding the strength of
a bank over the years. The present study has been carried out to observe the impact of
capital adequacy ratio on the profitability ratios of Punjab National Bank during the
implementation period of Basel II. The relationship between the Capital adequacy ratio
and profitability ratios has also been explained in the present study. The profitability
ratios like Dividend Payout Ratio, Return on Equity have shown decreasing trend
during the Basel II period whereas ratios like Return on Capital Employed, Return on
asset, Earning per Share and Dividend Payout Ratio have not shown consistent
decrease.
Stressed Assets Effect on Post Merger Scheduled Commercial Banks in Indiaijtsrd
This document discusses stressed assets and non-performing assets (NPAs) in Indian banks. It provides background on issues like rising NPAs, the Insolvency and Bankruptcy Code, and efforts by the Reserve Bank of India to resolve stressed assets. The Insolvency and Bankruptcy Code has helped improve recovery rates compared to previous mechanisms. While liquidations have been higher than resolutions so far under IBC, many of the cases involved were already non-viable. Overall, IBC represents a significant reform in debt resolution that can help reduce NPAs over time.
Non-banking financial companies (NBFCs) constitute an integral component of the Indian Financial system. They play a significant role in nation building and financial inclusion by complementing the banking sector in reaching extending credit to the unbanked segments of the populace, particularly to the micro, small and medium enterprises (MSMEs), which champions the idea of entrepreneurship and innovation. It is essential to note that NBFCs in India have witnessed a substantial metamorphosis over the past some years and has come to be recognized as one of the systematically crucial element of the financial system.
The Banking sector is also functioning in parallel to the NBFCs in financial front providing many other services which NBFCs are not able to offer. Banks has always been highly regulated, however simplified sanction procedures, flexibility and timeliness in meeting the credit needs and low cost operations resulted in the NBFCs getting an edge over banks in providing funding
This document presents a new composite index of financial inclusion constructed using factor analysis. It uses data from the IMF's Financial Access Survey to select relevant variables and identify the key dimensions of financial inclusion. Factor analysis is employed to derive weights for each variable and dimension without assuming equal weights. Two main dimensions are identified - outreach of financial services and use of financial services. Countries are then ranked based on their scores on the new composite index, which aggregates the dimensional indicators in a non-linear way. The index is intended to provide a robust measurement of financial inclusion across countries over time that can help with policymaking and surveillance.
Assessing Countries’ Financial Inclusion Standing: A New Composite IndexDr Lendy Spires
This document discusses the construction of a new composite index to measure countries' level of financial inclusion. It uses factor analysis on data from the IMF's Financial Access Survey to identify two dimensions of financial inclusion - outreach of financial services and use of financial services. Variables related to the number of ATMs, bank branches, depositors and borrowers in each country are analyzed. The index is then calculated by aggregating these two dimensional sub-indices using a non-linear formula. Countries are ranked based on their score on the composite index, providing a new analytical tool to assess financial inclusion.
A Study on Factors Influencing the Financial Performance Analysis Selected Pr...Dr. Amarjeet Singh
The growth of a country's banking sector has a significant impact on its economic development. The banking sector plays a critical role in determining a country's economic future. A well-planned, structured, efficient, and viable banking system is an essential component of an economy's economic and social infrastructure. In modern society, a strong banking system is required because it meets the financial needs of the modern society. In a country's economy, the banking system plays a crucial role. Because it connects surplus and deficit economic agents, the bank is the most important financial intermediary in the economy. The banking system is regarded as the economy's lifeline. It meets the financial needs of commerce, industry, and agriculture. As a result, the country's development and the banking system are intertwined. They are critical in the mobilisation of savings and the distribution of credit to various sectors of the economy. India's private sector banks play a critical role in the country's economic development. So The financial performance of private sector banks must be evaluated carefully.
Indian economy current problems and future prospectsKulandaivelu GfK
This document provides an overview of the current state of the Indian economy and prospects for the future. It notes several paradoxes, including high fiscal deficits despite low inflation and interest rates. While the current account is in surplus and foreign reserves are high, this situation is unusual for a developing country which typically relies on capital inflows to finance domestic investment. The document compares India's economic integration and performance to China's, and argues India could experience sudden capital outflows if interest rates rise abroad. Overall it suggests the economy is in an unhealthy state and private investment may be crowded out by large government deficits.
Interim Financial Reporting and Compliance with SEBIs guidelines the case of ...PradeepKhadaria
This study examines interim financial reporting practices and compliance with regulatory guidelines among financial companies listed on the National Stock Exchange of India. The researchers analyzed interim reports from 52 large financial companies to evaluate the level of general and technical disclosure based on a 21-item index. Preliminary results found that over 75% of companies complied with general disclosure requirements while over 85% complied with technical requirements. Additionally, most sample companies were younger firms (under 10 years old) and reported interim results as condensed statements in English. The study aims to determine if factors like company age, size or sub-sector relate to differences in disclosure levels in the reports.
This document summarizes a paper that assesses India's current fiscal situation and examines reforms needed to improve fiscal policy. It finds that India faces a potentially grave fiscal crisis that could lead to economic problems. While deficits were reduced in the 1990s, they have widened again since 1997-98. The paper calls for controlling deficits but notes this must be done through broader reforms of fiscal, monetary, exchange rate, and institutional policies. It argues a theoretical framework is needed to analyze these linkages and the long-term impacts of short-term adjustment programs. Such a framework could provide a basis for empirical modeling to inform policymaking.
FOREIGN DIRECT INVESTMENT IN INFRASTRUCTUREVivek Mahajan
This document is a project report submitted by a student to the University of Mumbai on foreign direct investment (FDI) in infrastructure in India. It contains an introduction outlining the importance of FDI for capital formation and economic growth in India. The objectives are to compare FDI inflows pre- and post-liberalization, identify factors influencing FDI in infrastructure, and study potential for FDI in infrastructure. Literature review findings note advantages of Build-Operate-Transfer models for infrastructure projects. Secondary data sources include RBI, economic surveys, and government departments. The methodology uses secondary data from articles, books, websites, and journals.
The document is a report from the Expert Committee to Revise and Strengthen the Monetary Policy Framework in India. It discusses the changing global monetary policy environment and the need to review India's monetary policy framework. The committee was appointed in September 2013 by the Governor of the Reserve Bank of India to recommend ways to revise and strengthen India's monetary policy framework to make it more transparent and predictable. The committee comprised both internal and external experts in monetary economics.
This document is an abstract for a study investigating the impact of central bank intervention on exchange rate volatility in India from 2000-2011. The study uses a GARCH model to analyze the relationship between the monthly Rupee-USD exchange rate, net FII inflows, RBI intervention amounts, and interest rate differentials. The results found that RBI intervention did not have a significant impact on exchange rate volatility, unlike some previous studies. This contrasts with observable successful RBI interventions to support the falling rupee. The study could be improved by accounting for structural breaks like the financial crisis.
This document summarizes Rakesh Mohan's remarks on the impact of the global financial crisis on India and Asia. Some key points:
- India has been relatively resilient so far due to a calibrated approach to financial liberalization, including prudent capital controls and regulation of banks and debt flows.
- India's economy and financial markets are more integrated globally now but capital account remains only partially open, with foreign direct investment encouraged more than debt flows.
- The Reserve Bank of India has imposed various prudential regulations on banks, including liquidity and capital requirements, to increase resilience against external shocks.
IMPACT ON INDIAN BANKS’ PROFITABILITY INDICATORS – AN EMPIRICAL STUDYIAEME Publication
The Indian banking system consists of 26 public sector banks, 20 private sector banks, 43 foreign banks, 56 regional rural banks, 1,589 urban cooperative banks and 93,550 rural cooperative banks, in addition to cooperative credit institutions. The Indian banking sector’s assets reached US$ 1.8 trillion in FY14 from US$ 1.3 trillion in FY10, with 70 per cent of it being accounted by the public sector. Indian banks are increasingly focusing on adopting integrated approach to risk management. Banks have already embraced the international banking supervision accord of Basel II. According to RBI, majority of the banks already meet capital requirements of Basel III, which has a deadline of March 31, 2019. Most of the banks have put in place the framework for asset-liability match, credit and derivatives risk management.
This document discusses banking sector reforms in India. It provides background on banking sector reforms initiated after 1991, including recommendations from the Narasimham Committee reports. The objectives of the study are outlined as having an overview of post-1991 reforms, evaluating the overall banking system scenario in India, and studying banking sector growth and performance. The structure of the Indian banking system is described, including the roles of public and private sector banks, regional rural banks, cooperative banks, and the Reserve Bank of India as the central bank and monetary authority.
Navigating the world of forex trading can be challenging, especially for beginners. To help you make an informed decision, we have comprehensively compared the best forex brokers in India for 2024. This article, reviewed by Top Forex Brokers Review, will cover featured award winners, the best forex brokers, featured offers, the best copy trading platforms, the best forex brokers for beginners, the best MetaTrader brokers, and recently updated reviews. We will focus on FP Markets, Black Bull, EightCap, IC Markets, and Octa.
Event Report - SAP Sapphire 2024 Orlando - lots of innovation and old challengesHolger Mueller
Holger Mueller of Constellation Research shares his key takeaways from SAP's Sapphire confernece, held in Orlando, June 3rd till 5th 2024, in the Orange Convention Center.
IMPACT Silver is a pure silver zinc producer with over $260 million in revenue since 2008 and a large 100% owned 210km Mexico land package - 2024 catalysts includes new 14% grade zinc Plomosas mine and 20,000m of fully funded exploration drilling.
At Techbox Square, in Singapore, we're not just creative web designers and developers, we're the driving force behind your brand identity. Contact us today.
SATTA MATKA SATTA FAST RESULT KALYAN TOP MATKA RESULT KALYAN SATTA MATKA FAST RESULT MILAN RATAN RAJDHANI MAIN BAZAR MATKA FAST TIPS RESULT MATKA CHART JODI CHART PANEL CHART FREE FIX GAME SATTAMATKA ! MATKA MOBI SATTA 143 spboss.in TOP NO1 RESULT FULL RATE MATKA ONLINE GAME PLAY BY APP SPBOSS
Zodiac Signs and Food Preferences_ What Your Sign Says About Your Tastemy Pandit
Know what your zodiac sign says about your taste in food! Explore how the 12 zodiac signs influence your culinary preferences with insights from MyPandit. Dive into astrology and flavors!
The 10 Most Influential Leaders Guiding Corporate Evolution, 2024.pdfthesiliconleaders
In the recent edition, The 10 Most Influential Leaders Guiding Corporate Evolution, 2024, The Silicon Leaders magazine gladly features Dejan Štancer, President of the Global Chamber of Business Leaders (GCBL), along with other leaders.
Recruiting in the Digital Age: A Social Media MasterclassLuanWise
In this masterclass, presented at the Global HR Summit on 5th June 2024, Luan Wise explored the essential features of social media platforms that support talent acquisition, including LinkedIn, Facebook, Instagram, X (formerly Twitter) and TikTok.
B2B payments are rapidly changing. Find out the 5 key questions you need to be asking yourself to be sure you are mastering B2B payments today. Learn more at www.BlueSnap.com.
At Techbox Square, in Singapore, we're not just creative web designers and developers, we're the driving force behind your brand identity. Contact us today.
Top mailing list providers in the USA.pptxJeremyPeirce1
Discover the top mailing list providers in the USA, offering targeted lists, segmentation, and analytics to optimize your marketing campaigns and drive engagement.
Discover timeless style with the 2022 Vintage Roman Numerals Men's Ring. Crafted from premium stainless steel, this 6mm wide ring embodies elegance and durability. Perfect as a gift, it seamlessly blends classic Roman numeral detailing with modern sophistication, making it an ideal accessory for any occasion.
https://rb.gy/usj1a2
1. WP/17/32
Inflation-Forecast Targeting for India:
An Outline of the Analytical Framework
by Jaromir Benes, Kevin Clinton, Asish George,
Joice John, Ondra Kamenik, Douglas Laxton, Pratik Mitra,
G.V. Nadhanael, Hou Wang, and Fan Zhang
IMF Working Papers describe research in progress by the author(s) and are published
to elicit comments and to encourage debate. The views expressed in IMF Working Papers
are those of the author(s) and do not necessarily represent the views of the IMF, its Executive
Board, or IMF management.
4. 2
Contents Page
I. Introduction ............................................................................................................................3
II. Flexible Inflation Targeting: An Overview...........................................................................4
III. Three Recent Phases of Inflation in India: A Macroeconomic View ..................................4
IV. International Experience with IFT.....................................................................................10
V. Challenges for Implementing IFT in India .........................................................................14
VI. Quarterly Projection Model...............................................................................................19
VII. Illustrative Core-QPM Monetary Policy Experiments.....................................................24
VIII. Conclusion ......................................................................................................................32
Boxes
Box 1. Six Principles of Inflation Targeting..............................................................................5
Tables
Table 1. Outline of Core-QPM Equations ...............................................................................20
Table 2. Endogenous Credibility Process ................................................................................23
Figures
Figure 1. Macro-Narrative of Inflation in India.........................................................................6
Figure 2. New Zealand - Inflation and Inflation Expectations ................................................10
Figure 3. Canada - Inflation and Inflation Expectations..........................................................11
Figure 4. Czech Republic - Inflation and Inflation Expectations ............................................11
Figure 5. US - Inflation and Inflation Expectations.................................................................12
Figure 6. India - Inflation and Inflation Expectations..............................................................13
Figure 7. Key Interest Rates in India .......................................................................................14
Figure 8. Relative Price of Food in India.................................................................................16
Figure 9. Policy Credibility or Lack of Credibility..................................................................18
Figure 10. Monetary Policy Model: IFT Feedback Response and Transmission....................21
Figure 11. Convex Phillips Curve............................................................................................22
Figure 12. Disinflation with Endogenous Credibility..............................................................25
Figure 13. Disinflation with Perfect Credibility ......................................................................26
Figure 14. Demand Shocks......................................................................................................27
Figure 15. Supply Shocks ........................................................................................................28
Figure 16. Sequence of Nasty Supply Shocks .........................................................................29
Figure 17. Delay of Policy Response.......................................................................................30
Figure 18. Sequence of Nasty Supply Shocks—Perfect Credibility........................................31
Figure 19. Delay of Policy Response—Perfect Credibility.....................................................32
References...............................................................................................................................33
5. 3
I. INTRODUCTION
This paper outlines an analytical framework for the implementation of flexible inflation
targeting (FIT) in India. It follows upon the recommendations of the Expert Committee to
Revise and Strengthen the Monetary Policy Framework Report (January 2014)2
, the
subsequent Agreement on Monetary Policy Framework by Government of India (GoI) and
RBI on February 20, 20153
and the amendment of the Reserve Bank of India Act in May
2016 paving the way for the adoption of flexible inflation targeting framework for monetary
policy and the constitution of a Monetary Policy Committee.4
After providing a broad
overview of the FIT framework, the paper provides a brief account of the macroeconomic
developments since 2000 to highlight the macroeconomic challenges faced by monetary
policy at different phases. This is followed by a brief discussion on the international
experiences with implementation of the FIT and the insights that could be useful in the
implementation of the framework in the Indian context. Thereafter, the paper discusses the
key challenges in adopting FIT in India, given its unique structural characteristics. The
details of the core quarterly projection model (QPM) within the FIT are presented thereafter
with illustrations on how the core-QPM could be used to think about monetary policy
response to various scenarios including supply shocks. The final section provides the
conclusions.
This paper needs to be read along with the companion paper Benes and others (2016)5
which
implements a full-scale production version of the QPM for India. The core-QPM described in
this paper draws heavily on the production-QPM for its overall structure and calibrations, and
as such much of the validation of the core-QPM is based on the production-QPM given in
Benes and others (2016). While the production-QPM goes into a high level of depth in term
of inflation processes, treatment of shocks and monetary policy transmission of the economy,
the focus of the core-QPM described in this paper is to have an analytical discussion on
optimal monetary policy responses under the FIT framework in an economy faced with
considerable uncertainties, both in terms of shocks and in terms of underlying structural
factors conditioning the monetary policy transmission. An overview of the FIT regime is
discussed in Section II. Section III presents a narrative of the inflation process in India in the
past decade and half. Country experiences with FIT are presented in Section IV, followed by
Section V, which describes the key challenges in implementing FIT in India. Section VI
2
Henceforth Expert committee.
3
See GoI (2015).
4
See GoI (2016).
5
Benes, J., K. Clinton, A. George, P. Gupta, J. John, O. Kamenik, D. Laxton, P. Mitra, G.V. Nadhanael, R.
Portillo, H. Wang, and F. Zhang, 2016, “Quarterly Projection Model for India: Key Elements and Properties,”
Reserve Bank of India Working Paper WPS 08/2016.
6. 4
presents the core-QPM, and Section VII presents some policy simulations based on the core-
QPM. Section VIII concludes.
II. FLEXIBLE INFLATION TARGETING: AN OVERVIEW
Since the central bank’s own forecast contains all the information it possesses relevant to the
outlook for inflation—including policymakers’ preferences regarding the short-run trade-off
between output and inflation, as well as the estimated effects of shocks working their way
through the economy—it depicts an ideal intermediate target for monetary policy over the
relevant policy horizon. Therefore, inflation-forecast targeting (IFT) is systematic,
operational, flexible inflation targeting6
. A successful policy regime provides an anchor to all
nominal values, resulting in a significant reduction of uncertainty (Box 1). The appropriate
analytical framework works back from this anchor, and provides monetary policy with
feasible medium-term paths consistent with it. In particular, it allows for the derivation of
paths for the policy rate which guide the short-term interest rate in a way that the inflation
objective is achieved.7
In this framework the policy interest rate has to be endogenous,
determined ultimately by the goal—otherwise the system has no nominal anchor.
Actual inflation at any point of time may not be equal to the target within FIT as there are
multiple shocks that affect inflation. There is a clear recognition that it would take time to
bring inflation back to the target after a shock, given the lagged effects of monetary policy
through the transmission mechanism. As a medium-term framework, it is important to
recognize that occasional deviations from the glide path should not be interpreted per se as
monetary policy errors that require correction. The actual speed at which inflation adjusts to
the long-run target would depend on the nature and the magnitude of shocks hitting the
economy and the response of monetary policy.
III. THREE RECENT PHASES OF INFLATION IN INDIA: A MACROECONOMIC VIEW
The change in monetary policy framework in India towards FIT has to be seen in the context
of macroeconomic developments that preceded this major development. Since 2000, a closer
examination of the Indian economy indicates that it underwent three distinct phases with
different inflation trajectory and policy response (Figure 1).
6
The term inflation-forecast targeting is due to Svensson (1997).
7
This paper assumes that the central bank sets the policy rate with the objective of keeping the short-term
market rate of interest at any desired level. Central banks normally have close control only over a very short-
term interest rate, typically an overnight rate (e.g., the federal funds rate in the United States). In advanced
economies this has an overriding influence on money market interest rates in general—and hence a significant
influence over the longer-term rates affecting households and firms. These linkages are weaker in developing
economies such as India—one of the challenges discussed below.
7. 5
Box 1. Six Principles of Inflation Targeting
1. The primary role of monetary policy is to provide a nominal anchor (i.e., low, stable long-
run inflation expectations) for the economy; the weights given to any other objective must be
consistent with this.
2. Effective inflation targeting has beneficial first-order effects on welfare by reducing
uncertainty, anchoring inflation expectations and reducing the incidence and severity of
boom-bust cycles.
3. Fiscal and other government policies may make the task of monetary policy easier and
more credible, or more difficult and less credible.
4. Because of
lags in the monetary transmission mechanism, and
concern for deviations of output from potential, as well as of inflation from the long-
run target,
following shocks it is not desirable to aim at keeping inflation exactly on target.
5. In view of possible short-run trade-offs between the inflation targets and other objectives,
the conduct of monetary policy must have sufficient independence from the political process
to achieve the announced objectives.
6. Effective monitoring and accountability mechanisms are required to ensure that central
banks behave in a manner consistent with announced objectives and sound practice.
Source: Adapted from Freedman and Laxton (2009).
Phase I: Moderate inflation and strong growth, 2000–08
In 1998, India adopted a multiple-indicator approach8
as the monetary policy framework
against an earlier regime of monetary targeting in India. The policy operated without an
explicit nominal anchor but with low and stable inflation as one of the prime objectives and
using interest rates as the primary source of monetary policy transmission. Though the
Reserve Bank used a slew of sectoral Consumer Price Indices (CPIs) and the all-India
Wholesale Price Index (WPI) to understand price movements, monetary policy
communication was predominantly based on an assessment of inflation in terms of WPI.
8
Under the multiple-indicator approach, interest rates or rates of return in different markets along with
movements in currency, credit, fiscal position, trade, capital flows, inflation rate, exchange rate, refinancing and
transactions in foreign exchange—available on a high frequency basis—were juxtaposed with output data for
drawing policy perspectives.
8. 6
Figure 1. Macro-Narrative of Inflation in India
Note: CPI inflation rates are on a year-on-year basis. Combined CPI since 2012;
pre-2012, backcast using re-weighted CPI-IW data.
Source: Authors’ calculations.
The macroeconomic scenario in the early 2000s was that of an economy experiencing
considerable slowdown in growth resulting from a combination of domestic and external
factors. Even though the economy saw two years of deficient monsoons in close succession
(2002 and 2004), overall food inflation remained benign. Coupled with weakened demand
conditions, overall inflation, therefore, remained well inside the comfort zone. Monetary
policy at the start of the decade was expansionary to support the growth recovery, with the
key policy rates seeing a reduction by 300 basis points during 2001-05.
With growth firming up, underlying inflation pressures started to emerge in early 2005,
prompting a reversal of monetary policy stance to a tightening mode. As a result of the
implementation of the Fiscal Responsibility and Budget Management (FRBM) rules in 2004,
fiscal deficit of the central government which was at 4.3 percent in 2003-04 was sequentially
brought down to 2.5 percent in 2007-08 and helped to contain the risk of expansionary fiscal
policies engendering aggregate demand pressures. The steady capital-inflows-induced real
appreciation of the currency helped to moderate imported inflationary pressures.
Furthermore, even as commodity prices started to edge up since 2005, its immediate pass-
through was muted on account of administered pricing of many products, especially fuel9
.
9
See Khundrakpam (2008).
-4
-2
0
2
4
6
8
10
12
14
-4
-3
-2
-1
0
1
2
2002Q2
2002Q4
2003Q2
2003Q4
2004Q2
2004Q4
2005Q2
2005Q4
2006Q2
2006Q4
2007Q2
2007Q4
2008Q2
2008Q4
2009Q2
2009Q4
2010Q2
2010Q4
2011Q2
2011Q4
2012Q2
2012Q4
2013Q2
2013Q4
2014Q2
2014Q4
2015Q2
Output Gap CPI (RHS) Policy Rate (RHS) WPI (RHS)
Phase I Phase II Phase III
(Percent) (Percent)
9. 7
Though inflation, on average, was steady at 5-6 percent and in line with policy objectives
during this phase, by 2008 inflation as measured by WPI breached single digits to a level
much above the comfort zone of the Reserve Bank. CPI inflation also registered a sharp
increase. A sustained rise in global commodity prices in general and especially that of crude
oil and its lagged pass-through to administered prices shot up fuel inflation, and through the
input-cost channel and second-round effects fed into the underlying inflation process.
Further, the economy was showing signs of overheating from growth rates in excess of 9
percent for three consecutive years. Aggregate demand pressures were further accentuated by
unprecedented capital-flow-induced domestic surplus liquidity conditions, which then fueled
high credit growth and asset price increases.
This was happening even as the policy rate was raised by a cumulative 300 basis points to a
peak of 9 percent in 2008. However, policy rates in real terms, though positive, witnessed a
sharp fall. Monetary policy in this period was undertaken in a challenging environment of
unprecedented capital inflows. Other than interest rates, a number of monetary policy
instruments were used to modulate domestic liquidity and aggregate demand and maintain
macro-stability. The cash reserve ratio (CRR) was increased sharply concomitant with rate
hikes to mop up surplus domestic liquidity and strengthen monetary transmission. Outright
sterilization through market stabilization scheme was also carried out. Furthermore, to
modulate leverage and asset price inflation, macro-prudential measures in the form of higher
risk weights and provisioning norms were prescribed for bank lending.
Phase II: Persistently high inflation: 2008–13
In the immediate aftermath of the Lehman Brothers collapse and the resulting contagion in
global financial and commodity markets, which snowballed into the global financial crisis
(GFC), GDP growth in India saw a sharp fall. In addition to the sharp contraction in external
demand, the freeze in foreign financial markets quickly transmitted to a temporary disruption
in short-term lending by banks, adversely impacting trade and domestic activity. However, as
calm returned to financial markets, by the second half of 2009, growth saw a sharp rebound
to touch close to 9 percent in 2010-11 aided by both expansionary fiscal policy and monetary
easing. Hence, the large negative output gap at the start of 2009 turned positive in about two
quarters time.
Inflation as measured by CPI and WPI initially saw considerable divergence, primarily
reflecting the larger share of tradable primary commodity in WPI, prices of which slumped
immediately in response to the GFC while CPI inflation remained elevated near double
digits. A series of supply-side commodity price shocks pushed WPI inflation up from
negative territory in early 2009 to around 10 percent in 2010 and inflation process quickly
became generalized. One of the proximate causes of the upturn was the monsoon shock of
2009 and the resultant rise in food inflation. Food price pressures persisted even after the
monsoon shocks faded away, possibly reflecting the impact of government interventions in
10. 8
agricultural product and labor market—such as a sharp increase in Minimum Support Prices
(MSPs) and enhanced coverage under the Mahatma Gandhi National Rural Employment
Guarantee Act (MGNREGA). Along with this, changes in food consumption pattern in
response to rising incomes led to demand-supply mismatches in specific food groups. This
resulted in the relative prices of food to rise sharply during this period. In a scenario of
rapidly increasing world oil prices, its pass-through, though partially offset by administered
price mechanism, led to higher domestic prices. Consequently, given the post-crisis
slowdown in potential output, strong demand pressures along with rising input costs, through
wages and raw-material prices, quickly transmitted to output prices of goods and services
leading to sharp increases in underlying inflation. Furthermore, persistent food and fuel price
shocks in a context of low monetary policy credibility led to drift in inflation expectations
contributing further to overall inflation persistence.10
Monetary policy during this period was characterized first by a normalization from crisis-
driven expansionary policies and subsequently to a series of calibrated tightening measures
on concerns of inflation persistence while being mindful of the durability of the growth
recovery. The monetary policy response at this time was further challenged by difficulties in
assessing the state of the economy both due to the difficulties in assessing the extent of loss
of potential output and issues relating to data in a scenario of considerable uncertainty.
Furthermore, the continuation of an expansionary fiscal stance right up to 2009-10 in the
midst of a strong pick-up in domestic demand added further challenges. Subsequently,
entrenched inflationary pressures led monetary policy to shift gears to aggressive tightening.
However, on concerns of a sharp slowdown in the economy and signs of moderation in
inflation, key policy rates were eased during 2012 and the first half of 2013.
The lack of a credible nominal anchor during this period, and the consequent de-anchoring of
inflation expectations, has had deleterious impact on overall macroeconomic environment.
As documented in the Expert committee report, persistent and elevated inflation in the post-
crisis period led to an erosion of savings in view of negative real interest rates on bank
deposits, loss of competitiveness and worsening of trade deficit, inter alia, on account of
higher gold demand, which was used as a hedge against rising inflation. These
macroeconomic vulnerabilities led to several concerns on macro-financial stability which
manifested in terms of the turmoil following the taper tantrum in 2013. Towards the latter
part of 2013 with the availability of all-India CPI (Combined)—although with a short
history—monetary policy communication began to be increasingly carried out in terms of
CPI than WPI. It was in this context that the need for a review of the monetary policy
framework was felt and the Expert committee was formed.
10
A list of studies on the inflation process in this period include Patra and Ray (2010), Basu (2011), Gokran
(2011), Darbha and Patel (2012), Nadhanael (2012), Patra, Khundrakpam, and George (2014), Gulati, Jain, and
Nidhi (2013), Sonna and others (2014), Mohanty and John (2015), Bhattacharya and Gupta (2015).
11. 9
Phase III: Disinflation and a new framework: 2014 – till date
Following the recommendations of the Expert committee report, the start of 2014 saw RBI
endorsing the glide path of CPI inflation—to reach 8 percent by January 2015 and 6 percent
by January 2016 and moving towards a flexible inflation targeting framework. Though CPI
inflation moderated from double digit levels to single digits, it continued to remain elevated
and persistent at the start of 2014, as the pass-through of exchange rate depreciation
following the taper tantrum played out through the economy even as aggregate demand
started to wane. To break the inflation persistence, key policy rates were increased in January
2014 further reinforcing the earlier hikes in the second half of 2013. By the second half of
2014 underlying inflation started to ease on a more sustained basis. This was further aided by
sharp fall in commodity prices, especially crude oil, and the return of a relatively stable
exchange rate. Furthermore, in spite of deficient monsoons, food inflation moderated towards
the end of 2014 on a combination of better supply-management policies, and moderate
increase in MSPs. This led to a correction in the relative price of food, which had been
trending sharply upwards post 2008. As a result, headline inflation saw a rapid decline to 5.2
percent in January 2015, significantly undershooting the glide path target. Along with it,
household inflation expectations moderated somewhat and expectations on part of
professional forecasters became better anchored to the inflation glide path. Since January
2015, inflation conditions evolved generally in accordance with the disinflation glide path
reaching 5.7 percent in January 2016 (below the disinflation target of 6 percent set for
January 2016).
The move towards a flexible inflation targeting framework was formalized through an
agreement between the RBI and the government in February 2015. As the economy remained
within the path of broad-based disinflation, with a view to support growth, in a scenario of
renewed concerns on the strength of recovery of global economy, the policy repo rate was
reduced by 150 bps during January 2015 to April 2016. The Finance Act 2016 of May 2016
amended the Reserve Bank of India Act, 1934, to state price stability as the primary objective
of monetary policy, and the adoption of flexible inflation targeting with CPI as the nominal
anchor for monetary policy along with the setting up of a Monetary Policy Committee (MPC)
to set the policy rate to achieve the inflation objective (GoI, 2016). The amended RBI Act
came into effect in June 2016. In August 2016, the Government notified an inflation target of
4.0 percent, with 6.0 percent and 2.0 percent as the upper and lower tolerance levels
respectively, for the period up to March 31, 2021. The Government and the Reserve Bank
constituted the six-member MPC in September 2016.
The narrative of the key features of the inflation process since 2000 pointed to the lack of an
explicit nominal anchor as a key factor that led underlying inflation to drift upwards. In the
absence of a nominal anchor, relative price shocks to fuel as well as food quickly translated
into a persistent generalized inflationary process. The large role of food price shocks,
12. 10
especially, and energy price shocks, in shaping Indian inflation dynamics underscores the
need for a strong nominal anchor to anchor inflation and inflation expectations11
.
IV. INTERNATIONAL EXPERIENCE WITH IFT
Often, the arguments against IFT in countries such as India point towards the predominant
role of supply shocks in driving inflation conditions. International experiences with IFT in
countries that previously had weak price stability history, however, suggest that it may in fact
help in reducing the amplitude of such shocks. The experiences of New Zealand, Canada,
and the Czech Republic show that all three resorted to inflation targeting to deal with an
entrenched problem of high and variable inflation (Clinton and others, 2015; Figures 2-4
below). In Canada and New Zealand high inflation originated with an inadequate framework
for resisting inflation impulses from supply shocks in the 1970s. Long-term inflation
expectations ratcheted up. Low levels of inflation, and expectations that these would continue
over the long run, were eventually achieved. But this was at the cost of substantial loss of
output and employment during the transition to price stability.
Figure 2. New Zealand - Inflation and Inflation Expectations
Source: Consensus Economics and Haver Analytics.
11
See Rajan (2014), and Anand, Ding, and Tulin (2014).
13. 11
Figure 3. Canada - Inflation and Inflation Expectations
Source: Consensus Economics and Haver Analytics.
Figure 4. Czech Republic - Inflation and Inflation Expectations
Source: Consensus Economics and Haver Analytics.
14. 12
The experience in the United States is somewhat different, but with a similar outcome at the
end (Figure 5). The US Federal Reserve (Fed) policy—never having really broken down—
evolved gradually into its current regime, which looks a lot like FIT, although the Fed does
not self-identify as an inflation targeter (Alichi and others, 2015). The behavior of inflation
and inflation expectations over the last 3 decades has much in common with that in the 3
economies discussed above.
By the turn of the century, most central banks that adopted FIT had also set up a forecasting
and policy analysis system (FPAS), to assist the implementation of flexible inflation
targeting—in essence, as a core component of the FIT architecture. Calibrated monetary
policy models played a central role. The overriding justification for model calibration—as
opposed to equation-by-equation statistical estimation—is that models for useful policy
analysis must embody widely accepted theoretical principles, and yield empirically plausible
predictions. Traditionally estimated econometric models may not exhibit desirable
properties. Econometric estimation also suffers from its sensitivity to deficiencies in data
which made it a non-viable option for countries like New Zealand and the Czech Republic.
Figure 5. US - Inflation and Inflation Expectations
Source: Consensus Economics and Haver Analytics.
On a comparative perspective, the inflation in India showed similar pattern as that in the FIT
countries discussed above, except in the 1970s, a period which was plagued by oil shocks,
15. 13
droughts and war (Figure 6). There are stark similarities with the nature of problems that
countries like New Zealand, Canada, and the Czech Republic experienced at the time they
adopted inflation targeting with that faced by India during the years preceding the FIT. Yet,
there are a number of challenges that remain peculiar to India, some of which are detailed
below.
Figure 6. India - Inflation and Inflation Expectations
Source: Consensus Economics and Haver Analytics.
16. 14
V. CHALLENGES FOR IMPLEMENTING IFT IN INDIA
Transmission mechanism weaknesses
First and foremost, it is imperative to take into account the key India-specific characteristics
of the monetary policy transmission mechanism. Monetary policy transmission process is
found to have multiple channels with interest rate emerging as the most important monetary
policy transmission channel12
.Bank lending channel was also seen to exist and complement
the interest rate channel13
. Asset price and exchange rate channel of monetary policy
transmission, however, were found to be feeble in India14
.
On the interest rate transmission channel, historically while the transmission of policy rates
to money markets and financial market rates has been fairly complete, the transmission to
medium term bank lending rates was, however, sluggish (Figure 7).
Figure 7. Key Interest Rates in India
Note: All rates other than Weighted Average Lending Rate (WALR) represent the average rate for
the month of March. WALR is computed as on March 31st
of each financial year.
Source: RBI.
12
See RBI (2005), Mohan (2008), Patra and Kapur (2010), Aleem (2010), Bhattacharya, Patnaik, and Shah
(2011), Khundrakpam and Jain (2012), Kapur and Behera (2012), Mohanty (2012), Kletzer (2012), RBI (2014),
Das (2015).
13
See Pandit and others (2006), Bhaumik, Dang, and Kutan (2011), Bhatt and Kishor (2013).
14
See Singh and Pattanaik (2012), Khundrakpam (2007), Bhattacharya, Patnaik, and Shah (2008),
Khundrakpam and Jain (2012).
0
5
10
15
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Repo Rate
Weighted Average Call Money Rate
3-month T-bill Rate
Base Rate
Weighted Average Lending Rate (Outstanding Loans)
(Percent)
17. 15
The Expert committee highlighted a number of impediments to the transmission of policy
rate to lending rates, with administered interest rates, statutory preemptions, rigidities in
deposit rate structure and a lack of external benchmarks being the most prominent.
Administered interest rates take the form of interest rate on small saving schemes which is
administered by government policy. Small saving interest rates represent in one sense the
floor for savings deposit rates. During phases of monetary easing, if time deposit rates of
banks fall below the administered small savings rates, it could result in a situation wherein
the bank deposits migrate to small saving schemes in search of higher returns. This could be
alleviated in future as Government of India on February 16, 2016 announced measures to
align the small saving interest rates with the market rates of the relevant Government
securities. Furthermore, a large part of deposits of banks are retail-based and the fixed tenure
of deposits gives a rigidity to the cost of funds structure of banks. Creation of floating deposit
rate products also faces the challenge of lack of a transparent external money market
benchmark for pricing. High levels of statutory preemptions often lead to crowding out of
credit and artificially suppress the long-term risk-free interest rates, impeding transmission of
policy rates to longer rates. Another factor that has a significant bearing on the transmission
process is the impact of exogenous capital-flows-induced bouts of volatility in domestic
liquidity conditions. In the face of overwhelming inflows, capital flows that are left
unsterilized has a considerable bearing on overall monetary and financial conditions, as was
seen in the mid-2000s. At a much broader level, the recourse to informal finance by a
considerable section of the population, even as financial inclusion through institutional
sources have made tremendous progress over the last decade, undermines the efficacy of
monetary policy impulses in influencing aggregate demand. Impediments to transmission can
also arise on account of the pricing structure for loans followed by banks in India. This
would come about in the form of the computation of Base Rate15
based on the average cost of
funds by banks, resulting in lending rate pricing to be less sensitive to changes in policy rate.
Since April 2016, the Reserve Bank has made it mandatory for all banks to arrive at the Base
Rate using the marginal cost of funds.
Importance of food prices to changes in the CPI
Food group constitutes about 46 percent of the CPI basket in India and the high share of food
in CPI poses a significant challenge in FIT implementation. Food prices are highly
susceptible to supply shocks, which often manifest in India in the form of vagaries of rainfall
and its impact on agricultural output. Also, the changes in the underlying structure of the
economy and shifts in the composition of demand could generate trends in the relative price
of food which may lead to a secular divergence between food and non-food inflation (Figure
15
Base rate for loans by commercial banks refers to rates based on those elements of the lending rates that are
common across all categories of borrowers, and as such it represents the “floor” for bank lending rates to which
spread components are added to arrive at the lending rate for a particular borrower.
18. 16
8). In such a scenario, the efficacy of FIT could be questioned. Finally, there are a number of
interventions of the government in agricultural product markets such as setting of minimum
support prices and in labor markets in the form of employment guarantees and minimum
wages.
Figure 8. Relative Price of Food in India
Note: Ratio of Food Group Index to Overall CPI for Industrial Workers.
Source: RBI.
In terms of the conceptual framework, monetary policy affects the rate of inflation in the
short and medium term through the effect of the output gap on non-food non-fuel prices. This
would be typically incorporated into a macro model, wherein the Phillips curve operates
through the sticky prices of the core consumption basket. The high weight on food therefore
dilutes the medium-term effect of policy rate changes on overall CPI inflation. In addition,
the high variance of food prices introduces noise into the inflation rate that makes it difficult
for the public and policymakers alike to perceive the influence of monetary policy.
While recognizing the importance of swings in food prices in conditioning the medium-term
fluctuations in the CPI and the historical dominance of the food component in major cycles
of inflation in India, one should not use it as an argument against FIT. Rather, it underscores
the major weakness in the erstwhile policy regime: that it did not provide a firm nominal
anchor to buck the pass-through of food price shocks to generalized inflation. Under a
credible monetary policy regime with stable long-run inflation expectations, the relative price
changes, which monetary policy is powerless to affect, could have taken place through one-
off changes—without extended pass-through effects—to the overall inflation. In India, some
lags in the adjustment of prices to shocks is inevitable, especially in those administered by
95
97
99
101
103
105
107
109
111
113
115
Apr/06
Sep/06
Feb/07
Jul/07
Dec/07
May/08
Oct/08
Mar/09
Aug/09
Jan/10
Jun/10
Nov/10
Apr/11
Sep/11
Feb/12
Jul/12
Dec/12
May/13
Oct/13
Mar/14
Aug/14
Jan/15
Jun/15
(Index, 2001=100)
19. 17
the government. This, however, merely spreads out the shock but with stable expectations the
effect of supply shocks on inflation would be transitory in a credible monetary policy regime.
An established FIT program, therefore, provides an effective strategy for dealing with the
second-round effects of supply shocks. First, a credible long-run inflation target serves as an
anchor to expectations. Second, the central bank reinforces the anchor by publishing a
forecast that shows a medium-term path back to target along with its assessment of the
channels through which the inflation adjusts back to the target, taking into account all the
intrinsic lags in the adjustment process. As the FIT regime gains credibility, and wins the
public confidence in its ability to ensure price stability even in an economy subject to price
level shocks, inflation expectations would remain aligned to the medium-term target, which
in itself would ensure that the effects of supply shocks on inflation remain transitory.
The strong relative price trend, on the other hand, creates substantive uncertainties, and
become a communication problem. Trending relative prices would raise questions on the
legitimacy of the use of core inflation in policy formulation as core inflation may turn out to
be a systematically downward-biased indicator of headline inflation. The communication
becomes challenging following a food price shock, as the authorities cannot point to core
inflation to reassure the public that policy is on the right track when the target it expressed is
in terms of headline inflation. The challenge to monetary policy communication during a
period of trending relative prices, therefore, lies in providing an assessment of the likely size
and duration of the relative price trend.
No track record—the challenge of building credibility
Before the introduction of the FIT, the RBI did not have an explicit price stability mandate as
its overarching objective. Therefore, the public has no historical record from which it can
judge the commitment of the RBI to the announced long-run inflation target, or whether its
actions to this end will prove effective. Despite the regime change, the history of high and
unstable inflation doubtless weighs heavily in the public mind. Credibility, therefore, can be
established earned, over time, by achieving announced objectives, and by effective,
transparent communications. On the other side, it can be lost through policy actions
inconsistent with stated objectives.
Expectations may absorb or amplify shocks to the economy, the mechanism of which is
illustrated in Figure 9. In the event of an inflationary shock, even if the central bank raises
the policy rate, the effect on the economy depends on how the public interprets this action.
Credibility results in shock absorption. If the rate hike is perceived as the assertive
response by a credible central bank, long-term inflation expectations remain stable, and the
policy action raises the real rate. In addition, uncovered interest parity implies a drop in the
real price of foreign exchange:
20. 18
1
0 0
[ ] { },
t k t
k k
f
t j t j t j
j j
r z z r
where r and f
r represent domestic and foreign real interest rates, respectively, z is the real
exchange rate (where a decrease means an appreciation in the domestic currency), and u is
the country risk premium.
Figure 9. Policy Credibility or Lack of Credibility
Perception Inflation
of policy expectation
Source: Constructed by authors.
With the tightened monetary conditions, demand is reduced, a negative output gap is opened,
and inflation returns without unusual delay to the long-run target.
Lack of credibility can lead to shock amplification. If, however, the public perceives that
the central bank to be passive, expectations of inflation ( 1
t t
E ) could rise in a way such that
the change in the real rate ( t
r ) following the policy rate ( t
i ) increase is difficult to ascertain.
1
t t t t
r i E
.
In the worst situation, unanchored expectations amplify the initial impact of the shock, and
propagate to yield a prolonged inflation spiral. An observer might think that policy rate
increases are ineffectual in the fight against inflation, whereas the real problem is that the
policy actions are insufficiently aggressive given the shaky confidence in the ability to
deliver on the price stability objective.
During the initial years of the adoption of FIT, the credibility evolves gradually, which helps
in keeping the economy in between the two above discussed scenarios. It could also be
possible that credibility building happens at a rate faster or slower than expected, and such
dynamics should be clearly accounted for while calibrating the models for policy simulation.
Inflation
shock
Policy
rate
Active
credible
Passive
ineffective
Shock
amplified
Anchored
Shock
absorbed
21. 19
VI. QUARTERLY PROJECTION MODEL
Having discussed the key challenges faced in the implementation of FIT, we now turn to the
core quarterly projection model (QPM) to illustrate its key properties and how some of these
issues are addressed within the overall structure of QPM.
Overview
The foundation for the QPM family of models is a forward-looking, 4-equation, open-
economy model for monetary policy. The endogenous variables are the output gap, inflation,
interest rate, and exchange rate. This set-up is a standard modern-day workhorse for
forecasting and monetary policy analysis.
Table 1 lists the behavioral equations of the core-QPM. This model omits sectoral details
which are explained in detail in the production-QPM16
, which encompasses more elaborate
dynamics. It also contains a quadratic loss function, which embodies a more realistic view of
policymaking under FIT than the linear reaction function in the production model—while
small deviations from desired outcomes may be tolerable, very large deviations can lead to
dark corners (e.g., inflation spirals or deflation traps) that should be avoided like the plague
(Blanchard, 2014).
The output gap responds to the real interest rate and the real exchange rate. The expectations-
augmented Phillips curve allows for a trade-off between output and inflation in the short run,
but not in the long run. The exchange rate is determined via an uncovered interest parity
condition that allows for a risk premium. However, this is modified to reduce the sensitivity
of exchange rates to interest rate differentials so as to capture frictions relevant to India (e.g.,
capital controls and developing financial markets). A loss function penalizing deviations of
inflation from the target, output gaps, and interest rate variability determines monetary
policy—and hence the interest rate. Expectations are a combination of model-consistent (i.e.,
rational) and backward-looking components.
16
See Benes and others (2016).
22. 20
Table 1. Outline of Core-QPM Equations
Output gap
y
t
t
m
t
t
t
t
t z
r
y
y
E
y ˆ
4
3
1
2
1
1 ˆ
ˆ
ˆ
]
ˆ
[
ˆ
.
05
.
0
;
08
.
0
;
60
.
0
;
07
.
0 4
3
2
1
Definitions of the real interest rate and the real exchange rate
𝒓
̂𝒕
𝒎
= 𝒊𝒕 − 𝑬𝒕[𝝅𝒕+𝟏]
𝒛
̂𝒕 = 𝒔𝒕 + 𝒑𝒕
𝒇
− 𝒑𝒕
Inflation
t
t
y
t
t
t
t z
e
E t
ˆ
/
)
1
(
)
1
(
]
4
[ 4
3
ˆ
2
1
1
1
1
3
.
005
.
0
;
4
.
0
;
06
.
0
;
33
.
0 4
3
2
1
Monetary policy loss function
0
2
1
3
2
2
2
*
1 ]
)
(
ˆ
)
(
[
i i
t
i
t
i
t
i
t
i
t i
i
y
L
.
5
.
0
;
1
;
1
;
98
.
0 3
2
1
Uncovered interest parity with risk premium
S
t
t
t
t
t
f
t
t S
S
E
i
i
4
)
( 1
t
f
t
t
t
t
t
t z
Z
S
S
S
E t
ˆ
]
4
/
)
4
4
(
[
2
)
1
( 2
1
1
1
1
1
.
3
.
0
;
6
.
0 2
1
Weakened uncovered interest parity with risk premium
S
t
t
t
t
f
t
t
t
t
f
t
t S
S
E
Z
i
i
4
)
(
)]
4
4
(
4
[
)
1
(
)]
(
[ 1
1
1
1
1
.
7
.
0
1
Inflation expectations
1
5
1
1
1
1
1
4
1
1 1
)
1
(
4
)
1
(
4
]
4
[
i
t
i
i
t
t
t
t
t
t
t
t c
c
b
c
c
E
.
1
;
25
.
0
b
Notations: output gap (𝒚
̂𝒕), real interest rate gap (𝒓
̂𝒕
𝒎
), real exchange rate gap (𝒛
̂𝒕), shocks to aggregate
demand (𝜺𝒕
𝒚
̂
), domestic prices (𝒑𝒕), foreign price (𝒑𝒕
𝒇
), annualized quarterly changes in the seasonally-adjusted
logarithm of CPI (𝝅𝒕), inflation expectation (𝑬𝒕[𝝅𝟒𝒕+𝟏]), shocks to inflation (𝜺𝒕
𝝅
), interest rate (𝒊𝒕), nominal
exchange rate (𝑺𝒕), expected exchange rate (𝑬𝒕𝑺𝒕+𝟏), foreign nominal interest rate (𝒊𝒕
𝒇
), time-varying country
risk premium (𝝈𝒕), change in real exchange rate trend (∆𝒁
̅𝒕), year-on-year inflation (𝝅𝟒𝒕), foreign inflation
(𝝅𝟒𝒕
𝒇
), shocks to the exchange rate (𝜺𝒕
𝑺
), credibility stock (𝒄𝒕).
Note: The calibration of the coefficients is based on the production-QPM paper. For details see Benes and
others (2016).
Source: Authors’ calculations.
23. 21
Figure 10 illustrates how the FIT works. A crucial aspect of this is the feedback to the short-
term interest rate (policy rate), which is the instrument of monetary policy (the feedback is
depicted by dashed red lines in the chart).
Figure 10. Monetary Policy Model: IFT Feedback Response and Transmission
Source: Adapted from Clinton and others (2015).
The policy interest rate is endogenous, consistent with the nominal anchor to the system
implying that the interest rate has to follow a path consistent with the long-run inflation
target. For any initial deviation from target, however, there are many alternate interest rate
paths that would bring inflation back on track over the medium term: for example, large early
rate changes may get inflation on target quickly, but with a substantial adverse impact on
output; more gradual policy actions will achieve the target more slowly, but with less adverse
impact on output. Using this framework, alternate interest rate paths could be generated,
which are consistent with the inflation target, based on policymakers’ assessments of the
underlying macroeconomic situation.
Some specific features of core-QPM
The Phillips curve contains a non-linear output gap. The term ( 3 ˆ
2 3
( 1) /
t
y
e
) implies an
increasing marginal effect on the inflation rate as the gap increases. At wide negative output
gaps, the curve becomes quite flat (Figure 11).
24. 22
Figure 11. Convex Phillips Curve
Source: Authors’ calculations.
In view of the newness of the IFT regime, we assume that it takes time to establish its
credibility. Thus expectations formation includes a credibility building process (Table 2).
The central bank adds to its credibility stock by demonstrating that it is achieving the policy
goal. There are two types of expectation-building processes. The first type is optimistic yet
watchful: it attaches a positive weight (1 − 𝜌) to the central bank’s intermediate target for
inflation (i.e., the inflation target *
), but also some weight (𝜌) to past inflation. The second
type, conditioned by history, is skeptical. They believe that inflation is likely to wander off
back to some historical high level. Therefore, this belief puts some weight on a high level of
inflation ( H
), as well as on past inflation, but ignores the central bank’s inflation target.
The credibility signal, as defined by the relative squared forecast errors under the two types,
provides a measure of the extent to which inflation outcome is seen as consistent with the
central bank’s promise, where inflation goes down to the target over time. High values of the
credibility signals increase the credibility stock. However, it takes repeated good signals to
improve credibility significantly.
-0.3
-0.2
-0.1
0
0.1
0.2
0.3
0.4
-3 -2 -1 0 1 2 3
Impact
of
Output
Gap
on
Inflation
Output Gap
Nonlinear (Convex) Phillips Curve
Linearized Phillips Curve (Around Zero Output Gap)
(Percentage point)
Phillips Curve becomes very flat.
Phillips Curve becomes steeper.
Excess Supply Excess Demand
(Percent)
25. 23
Table 2. Endogenous Credibility Process
Credibility stock building
t
c
t
c
t c
c
)
1
(
1
.
80
.
0
c
Signal for revision of credibility based on squared forecast errors
2
2
2
)
(
)
(
)
(
L
t
H
t
H
t
t
Forecast error expected by optimists
]
)
1
(
4
[
4 *
1
t
t
L
t
Forecast error expected by skeptics
]
)
1
(
4
[
4 1
H
t
t
H
t
.
4
;
8
;
5
.
0 *
H
Boundary conditions
If 𝜋4𝑡 − [𝜌 𝜋4𝑡−1 + (1 − 𝜌)𝜋∗] < 0, then t
= 1.
If 𝜋4𝑡 − [𝜌 𝜋4𝑡−1 + (1 − 𝜌)𝜋𝐻
] > 0, then t
= 0.
Notations: year-on-year inflation (𝜋4𝑡), credibility stock (𝑐𝑡), credibility signal (𝜉𝑡), inflation target (𝜋𝑡
∗
).
Note: See Alichi and others (2009) for details.
Source: Authors’ calculations.
Monetary policy minimizes a quadratic loss-function, which penalizes squared deviations
from output and inflation objectives and large short-run interest rate changes. It is common to
use a linear (Taylor-type) rule to characterize monetary policy under inflation targeting. Such
an approach may be adequate for normal situations, which are not near dark corners—in
other words, deflation or high inflation traps. For India, the relevant dark corner could be a
situation in which expectations of high inflation become so entrenched that their elimination
would require huge costs in lost output and employment. Monetary policy would need to put
an increasing marginal cost on deviations from target as they grow.
Policymakers avoid sharp interest rate changes. The penalty in the loss function for steep
policy rate changes reflects the well-known preference of policymakers for gradual rate
movements. This has the economic rationale that policymakers uncertain about the source or
the duration of a shock will proceed cautiously. In addition, more variable changes in rates
26. 24
are liable to convey less information to the public about the stance of monetary policy. A
given policy rate change has more effect on longer-term interest rates and the exchange rate,
if there is less noise in its movements.
VII. ILLUSTRATIVE CORE-QPM MONETARY POLICY EXPERIMENTS
The most important function of a QPM type of model is to be a tool for policymakers to
assess the implications of alternate policy options under periods of uncertainty. We trace out
a few plausible scenarios in the Indian context so as to illustrate the policy options and their
likely implications using the QPM.
Disinflation
This experiment derives paths for endogenous variables in a disinflation goal that would take
inflation from 5 percent to 4 percent. Minimizing the loss function ensures that the latter is
achieved at the lowest cost in terms of loss in output, deviation of inflation from the target,
and interest rate variability. We assume an initial equilibrium with 5 percent inflation, and
hence a nominal interest rate of 7 percent (or a real rate of 2 percent). With initial credibility
not very high, the central bank has to hike the policy rate in the baseline (Figure 12). The
uncovered interest parity condition warrants a drop in the exchange rate (i.e., appreciation of
the rupee), under no further shocks to the system. The combination of interest rate increase
and exchange rate appreciation reduces demand, and opens a negative output gap. Inflation
declines first by the impact of the stronger rupee, and then, increasingly over time, by the
negative output gap. The cost in terms of cumulative forgone output is 2 percent of annual
GDP (i.e., a sacrifice ratio of 2). Credibility stock starts low initially, but as inflation declines
towards the target, the central bank receives repeated high credibility signals, and as a result,
it builds up the credibility stock over time. Eventually, as the credibility stock goes to one,
the lagged term in inflation expectations and the bias term both disappear, which implies a
much improved output-inflation trade-off. Hawkish policymakers would achieve the long-run
target slightly faster than the baseline. But they would raise the policy rate more, triggering a
sharper appreciation, a wider medium-term negative output gap, and hence a larger sacrifice
ratio. Dovish policymakers, in turn, with a higher weight on the output gap, would tighten
monetary conditions less than the baseline and hence the sacrifice ratio will be lower.
27. 25
Figure 12. Disinflation with Endogenous Credibility
Source: Authors’ calculations.
Figure 13 shows a path generated under the assumption that the policy stance is fully
credible. The 1-percent reduction in inflation is achieved within a 6-quarter time horizon, at
lower cost of lost cumulative output—one-half percent of annual GDP. In the baseline, the
tightening of policy is achieved without any increase in the policy interest rate—in effect, the
required increase in the real rate is achieved entirely through the reduced expectations of
inflation. In the case where policymakers place more weight on deviations of output from
long-run equilibrium, the more gradual approach further reduces the output cost. Where
policymakers exhibit willingness to tolerate short-term loss of output and employment and
accordingly place less weight on the output gap, there is a small policy rate increase, and a
slightly higher sacrifice ratio. But clearly, policymakers’ preference on the output gap makes
little material difference to outcomes in the prefect credibility situation.
28. 26
Figure 13. Disinflation with Perfect Credibility
Source: Authors’ calculations.
Mitigating demand shocks—the divine coincidence
Under optimal policy, the central bank raises (cuts) the policy rate to deal with positive
(negative) demand shocks (Figure 14). Dealing with such shocks does not create a conflict
between output and inflation objectives—the divine coincidence (Blanchard and Galí, 2007).
With the prompt, active response to the shock, inflation is held close to baseline in each case.
Given the flat Phillips curve under excess supply conditions, the widening of the output gap
has to be somewhat greater for the negative than for the positive shock. Because inflation is
well controlled, the demand shocks have no major impact on credibility.
29. 27
Figure 14. Demand Shocks
Source: Authors’ calculations.
Mitigating supply shocks—trade-offs
A nasty supply shock requires an increase in interest rates and a larger negative output gap
(relative to baseline) to maintain the path to the 4 percent long-run target (Figure 15). The
medium-term trade-off is between the speed of the approach to the target, and the size of the
output gap. A prompt and aggressive approach prevents long-term inflation expectations
from ratcheting upwards, and preserves credibility, but has higher costs in terms of short-run
output. By contrast, a favorable supply shock presents an attractive trade-off: inflation
moderates relative to baseline, and reaches 4 percent sooner; monetary policy eases; and
output gap closes faster.
30. 28
Figure 15. Supply Shocks
Source: Authors’ calculations.
The policy conflict can be seen more starkly in the context of repeated supply shocks (Figure
16). A sequence of nasty supply shocks requires a more aggressive tightening in monetary
conditions, and a steep widening of the output gap. Even so, in the medium term inflation
increases considerably—the short-run policy trade-off (“stagflation”) looks bad. Monetary
policy credibility takes a hit. Policy would, however, be successful in preventing long-term
inflation expectations from ratcheting up—even with bad luck, a committed central bank can
still successfully anchor long-term inflation expectations.
31. 29
Figure 16. Sequence of Nasty Supply Shocks
Source: Authors’ calculations.
Importance of prompt action versus delay in policy response
In the previous experiments prompt effective action helped reduce the losses to output and
monetary policy credibility following supply shocks. The importance of timely policy action
can be shown with an experiment in which policymakers wait before responding to a big
nasty supply shock. If the policy action is delayed, the interest rate hike has to be much
greater than under a baseline response, and the cumulative output gap is larger, albeit with
higher inflation (Figure 17). Thus a delay in policy response causes a substantial
deterioration in the medium-term output-inflation trade-off.
32. 30
Figure 17. Delay of Policy Response
Source: Authors’ calculations.
Importance of credibility
Even when policy is perfectly credible, a sequence of nasty shocks poses a dilemma—and
the longer the sequence the greater could be the deterioration in the policy trade-off. In the
medium term, the interest rate goes up, a negative output gap widens, but inflation rises
(Figure 18). There is a loss of policy credibility. Policy does succeed eventually in getting
inflation back on target, and restoring reputation, but the costs in terms of lost output are
substantial.
33. 31
Figure 18. Sequence of Nasty Supply Shocks—Perfect Credibility
Source: Authors’ calculations.
The credibility factor may not fully eliminate the costs of dealing with supply shocks, but it
does allow policymakers some leeway in terms of timing. Figure 19 compares prompt action
with delayed action under perfect credibility which indicates that delay does little damage.
However, repeated delays could undermine the credibility.
34. 32
Figure 19. Delay of Policy Response—Perfect Credibility
Source: Authors’ calculations.
VIII. CONCLUSION
This paper attempts to provide a broad overview of the analytical underpinnings of FIT
implementation. Historical experiences of countries which have adopted inflation targeting
have shown that having a credible policy with an emphasis on a strong nominal anchor can
reduce the impact of supply shocks to inflation and improve macroeconomic stability. The
core-QPM outlined in the paper traces out the India-specific features and provides a flavor of
how a QPM can be useful in FIT implementation. Illustrative experiments highlight the
challenges confronting monetary policy under different types of uncertainty and show that if
credibility is earned and preserved, monetary policy efficacy improves substantially.
35. 33
References
Aleem, A., 2010, “Transmission mechanism of monetary policy in India,” Journal of Asian
Economics, Vol. 21, pp. 186–197.
Alichi, A., K. Clinton, C. Freedman, M. Juillard, O. Kamenik, D. Laxton, J. Turunen, and H.
Wang, 2015, “Avoiding Dark Corners: A Robust Monetary Policy Framework for the
United States,” IMF Working Paper No. 15/134.
Anand, R., D. Ding, and V. Tulin, 2014, “Food inflation in India: The Role for Monetary
Policy,” IMF Working Paper No. 14/78.
Basu, K., 2011, “Understanding Inflation and Controlling It,” Economic and Political
Weekly, Vol. 46, No.41, Oct 8–14, pp. 50–64.
Benes, J., K. Clinton, A. George, P. Gupta, J. John, O. Kamenik, D. Laxton, P. Mitra, G.V.
Nadhanael, R. Portillo, H. Wang, and F. Zhang, 2016, “Quarterly Projection Model
for India: Key Elements and Properties,” Reserve Bank of India Working Paper WPS
08/2016.
Bhatt, V. and K. N. Kishor, 2013, “Bank Lending Channel in India: Evidence from State-
Level Analysis,” Empirical Economics, Vol. 45, No.3.
Bhattacharya, R., I. Patnaik, and A. Shah, 2008, “Exchange rate pass-through in India,”
Macro/Finance Group at NIPFP.
Bhattacharya, R., I. Patnaik and A. Shah, 2011, “Monetary Policy Transmission in an
Emerging Market Setting,” IMF Working Paper No. 11/5.
Bhattacharya, R. and A. S. Gupta, 2015, “Food Inflation in India: Causes and
Consequences,” NIPFP Working Paper No. 2015-151, June.
Bhaumik, S. K., V. Dang, and A. M. Kutan, 2011, “Implications of Bank Ownership for the
Credit Channel of Monetary Policy Transmission: Evidence from India,” Journal of
Banking & Finance, Vol. 35, No. 9, pp. 2418–2428.
Blanchard, O. and J. Galí, 2007, “Real Wage Rigidities and the New Keynesian Model,”
Journal of Money Credit and Banking, Vol. 39 (s1), pp. 35–65.
Blanchard, O., 2014, “Where Danger Lurks,” Finance & Development, September 2014,
Vol. 51, No. 3.
Clinton, K., C. Freedman, M. Juillard, O. Kamenik, D. Laxton, and H. Wang, 2015,
36. 34
“Inflation-Forecast Targeting: Applying the Principle of Transparency,” IMF
Working Paper No. 15/132.
Darbha, G. and U. R. Patel, 2012, “Dynamics of Inflation ‘Herding’: Decoding India's
Inflationary Process,” Working Paper 48, Global Economy and Development,
Brookings.
Das, S., 2015, “Monetary Policy in India: Transmission to Bank Interest Rates,” IMF
Working Paper No. 15/129.
Freedman, C. and D. Laxton, 2009, “Why inflation targeting?” IMF Working Papers No.
09/86.
Gokarn, S., 2011, “The Price of Protein,” Macroeconomics and Finance in Emerging Market
Economies, Vol. 4, No. 2; 327–335.
Government of India, 2015, “Agreement on Monetary Policy Framework between the
Government of India and the Reserve Bank of India,” February.
Government of India, 2016, “Amendments to The Reserve Bank of India Act, 1934, Chapter
XII, Miscellaneous, Part I, The Finance Act 2016,” pp. 82-87, May.
Gulati, A., S. Jain, and S. Nidhi, 2013. “Rising Farm Wages in India: The ‘Pull’ and ‘Push’
Factors,” Commission for Agricultural Costs and Prices Discussion Paper No. 5.
Kapur, M. and H. Behera, 2012, “Monetary Transmission Mechanism in India: A Quarterly
Model,” RBI Working Paper No. 09/2012.
Khundrakpam, J. K., 2007, “Economic reforms and exchange rate pass-through to domestic
prices in India,” BIS Working Papers 225, Bank for International Settlements.
Khundrakpam, J. K., 2008, “How Persistent is Indian Inflationary Process, Has it Changed?,”
Reserve Bank of India Occasional Papers Vol. 29, No. 2, Monsoon 2008.
Khundrakpam, J. K. and R. Jain, 2012, “Monetary Policy Transmission in India: A Peep
Inside the Black Box,” Reserve Bank of India, Working Paper No. 11/2012.
Kletzer, K., 2012, “Financial Friction and Monetary Policy Transmission in India,” in
ChetanGhate, ed., The Oxford Handbook of the Indian Economy, Oxford/New Delhi:
Oxford University Press.
Mohan, R., 2008, “Monetary policy transmission in India,” in Transmission Mechanisms For
Monetary Policy In Emerging Market Economies, Bank for International Settlements
2008, Vol. 35, pp 259–307.
37. 35
Mohanty, D., 2012, “Evidence on Interest Rate Channel of Monetary Policy Transmission in
India,” RBI Working Paper No. 6/2012.
Mohanty, D. and J. John, 2015, “Determinants of inflation in India,” Journal of Asian
Economics, Vol. 36, pp. 86–96.
Nadhanael, G. V., 2012, “Recent Trends in Rural Wages: An Analysis of Inflationary
Implications,” Reserve Bank of India Occasional Papers, Vol. 33, No. 1 & 2.
Pandit, B. L., A. Mittal, M. Roy, and S. Ghosh, 2006, “Transmission of monetary policy and
the bank lending channel: analysis and evidence for India,” DRG Study No. 25,
Reserve Bank of India.
Patra, M. D. and M. Kapur, 2010, “A Monetary Policy Model without Money for India,”
IMF Working Paper No. 10/183.
Patra, M. D. and P. Ray, 2010, “Inflation Expectations and Monetary Policy in India: An
Empirical Exploration,” IMF Working Paper No. 10/84.
Patra, M. D., J. K. Khundrakpam, and A. T. George, 2014, “Post-Global Crisis Inflation
Dynamics in India: What has Changed?” in Shekhar Shah, Barry Bosworth and
Arvind Panagariya eds. India Policy Forum 2013-14, Volume 10, Sage Publications,
July.
Rajan, R., 2014, “Fighting Inflation,” speech delivered at FIMMDA–PDAI Annual
Conference, February 26.
Reserve Bank of India, 2005, Report on currency and finance, 2003–04.
Reserve Bank of India, 2014, Report of the Expert Committee to Revise and Strengthen the
Monetary Policy Framework, January.
Singh, B. and S. Pattanaik, 2012, “Monetary Policy and Asset Price Interactions in India:
Should Financial Stability Concerns from Asset Prices be Addressed through
Monetary Policy?” Journal of Economic Integration, Vol. 27, pp. 167–194.
Sonna, T., H. Joshi, A. Sebastian, and U. Sharma, 2014, “Analytics of Food Inflation in
India,” RBI Working Paper Series (DEPR): 10/2014.
Svensson, L. E. O., 1997, “Inflation Forecast Targeting: Implementing and Monitoring
Inflation Targets,” European Economic Review, 41(6), pp. 1111-46.