Never miss a great news story!
Get instant notifications from Economic Times
AllowNot now


You can switch off notifications anytime using browser settings.
11,971.8061.65
Stock Analysis, IPO, Mutual Funds, Bonds & More

'Global markets turmoil fails to cripple RBI's policy independence'

It examined how RBI responds to global volatility-driven stress through its monetary policy tools in a market like India that are reasonably well-integrated into the global financial cycle.

, ET Bureau|
Updated: May 02, 2018, 10.49 PM IST
0Comments
KOLKATA: Strong foreign exchange reserves and active liquidity management by the Reserve Bank of India has helped Indian financial system face the turmoil in global markets, but the local markets will be tested for endurance in the period ahead as the US Federal Reserve is set to raise rates, said a research paper from RBI.

The Federal Reserve's monetary policymaking body — the Federal Open Market Committee is in the process of withdrawing the monetary accommodation that it has provided to the economy since the financial crisis began in 2007.

Since December 2015, Fed has increased short term rates to 1.5 percent to 1.75 percent from near zero level. It is expected to raise rates twice or thrice this year with the US economy showing higher growth.

“In bond, forex and equity markets, in which foreign presence provides a conduit for contagion, capital flows management buffered by foreign exchange reserves has provided a buffer, but it will be tested for endurance in the period ahead by the exhaust fumes of Fed normalisation and the idling engines of monetary super accommodation,” said the research paper authored by Executive Director Michael Debabrata Patra and others.

They said the local money market is insulated from external shocks by active liquidity management by RBI, which tend to offset fluctuations in market liquidity conditions brought on by domestic factors such as changes in government balances, currency demand and the like. Domestic prudential policies have also helped in insulating domestic bond markets.

“In India, money market is largely sheltered from spillovers and so too is credit market, highlighting the shielding influence of the RBI’s active liquidity management, besides country-specific factors that impart a distinct home bias,” the paper added.

It examined how RBI responds to global volatility-driven stress through its monetary policy tools in a market like India that are reasonably well-integrated into the global financial cycle.

Monetary policy does respond directly to volatility-driven stress in domestic financial market conditions, but this was seen as a policy choice with the objective of meeting domestic goals, rather than a loss of monetary policy independence. “Global shocks in a globalised economy are unavoidable, but stabilising the domestic economy, irrespective of the nature and sources of shocks to domestic transmission channels, remains a key task for domestic monetary policy,” the authors said.

Also Read

RBI satisfied with pace of monetary transmission

RBI has not put banks on alert: Shaktikanta Das

RBI reorganises supervision & regulatory departments

RBI to retain dovish bias going forward

Government borrowing may rise after RBI paused

Comments
Add Your Comments
Commenting feature is disabled in your country/region.
Download The Economic Times Business News App for the Latest News in Business, Sensex, Stock Market Updates & More.

Other useful Links


Follow us on


Download et app


Copyright © 2019 Bennett, Coleman & Co. Ltd. All rights reserved. For reprint rights: Times Syndication Service