“政策利率、市场利率、通货膨胀与经济增长”项目草案

A Project Draft On “PolicyInterest Rates, Market Rates, Inflation and Economic Growth” TeamArvinder S SachdevaFormer Senior Advisor, GoIBalbir KaurFormer Advisor, RBIDr. Pabitra K JenaAssist Prof,SMVD University Project InvestigatorDr. Charan SinghCEO and Director,EGROW Foundation998, Sector 29, Arun Vihar,Noida-201301, UP-India The study has benefitted from discussions with Prof. Ashima Goyal (IGIDR), Prof. BandiKamaiah (University of Hyderabad), Prof. N R Bhanumurthy (NIPFP and BASE, Bengaluru),Prof.Vighneswara Swamy(IBS),Prof.Lokendra Kumawat(Delhi University),Dr.CRangarajan (former Governor, RBI), S K Hota (MD, National Housing Bank), Mohan Tanksale(former CMD, Central Bank of India), S S Kohli (former CMD, Punjab National Bank), UdayaKumar (MD and CEO, Credit Access Grameen Koota), Subrata Gupta (Former MD, NABARDFinancial Services), Pillarisetti Satish (Executive Director, Sa-Dhan). The econometric contribution by Prof Vighneswara Swamy and Prof. Lokendra Kumawat, isalso thanfully acknowledged. Section 1 Introduction Monetary policy, as part of macro-policy, impacts economic growth and financial stability. TheReserve Bank of India (RBI) operates monetary policy through interest rates to finally impactinflation and economic growth. The extent to which monetary policy intervention affects the realeconomy has been a central theme in academic studies and public policy. Being a key indicatorof financial markets, interest rates have a strong impact on the economy. To identify thetransmission mechanism of monetary policy, operated through interest rate, on economic growth,is a challenging task faced by policy-makers and academics. Interest rate is a unique instrument which impacts many sectors. A higher interest rate can deterinvestment but attract the much needed capital flows for growth which can cause exchange rateto appreciate and adversely impact exports. Also, in a fiscally constrained country, cost ofborrowing tends to rise with increasing interest rates which further acts as a drag on growth ofthe economy through curtailing investment, both in public sector and through crowding out, inprivate sector. Investments, in particular, can show considerable sensitivity to variations ininterest rates though it can be argued that other variables, like uncertainty, also play a role ininvestment decisions. The last several years have witnessed greater reliance on monetary policy instruments to bringabout stabilisation in output levels and controlling rate of inflation, especially since 2008. Thishas been particularly the case in most of the advanced economies, which have witnessed lowinflation(generally lower than the mandated target), and who despite pursuing loose monetarypolicy for an extended period continue to experience low levels of inflation. One issue that hasbeen raised in recent literature relates to effectiveness of unconventional monetary policy since2008, in particular when interest rates are very low - often close to zero or even in the negativezone, and persistently so.Unconventional monetary policies are again being followed becauseof Covid-19. However, it’s too early to assess about its transmission and impact on growth,investment, inflation, etc. The situation in developing countries and more so in India, however, has been somewhatdifferent. India, witnessed close to double-digits annual average increase in the price level in theearly years of the decade starting in 2010. However, since 2013-14, the inflation rate hasdeclined to an average of less than 5 percent per annum. Of course, the reduction in inflation isnot attributable to monetary policy alone and a number of other factors have played a role.However, of late and more so, ever since India formally adopted 'inflation targeting' in 2016 asone of key mandates of the Reserve Bank of India, monetary policy has come to centre-stage forcontrolling inflation. The effectiveness of monetary policy depends on the overall policy environment within which aneconomy functions. The liberalisation of financial markets in India since the early 1990s hasproceeded at a gradual pace and has been characterised by permitting new banks to join, creationof new markets, and strengthening of money and G-Secs market. Theabove mentioned factors,apart from many others,tend to have an impact on thetransmission mechanism of the measures adopted by monetary authorities. In India, for example,large requirements on banks to hold government securities and persistently high fiscal deficit(Centre and States) have an impact on transmission of monetary policy measures to market rateof interest. However, greater economic and financial integration with the rest of world in theform of liberalisation of capital account, higher capital inflows, and flexible exchange rates, posechallenges to the effectiveness of monetary policy. Most of the literature in the context of monetary transmission in India seems to suggest that thereis limited pass-through from policy ra