The Reserve Bank of India today released Volume 37 of its Occasional Papers. RBI Occasional Papers is a research journal of the Reserve Bank and contains contributions of its staff and reflects the views of the authors. This issue contains four articles and two book reviews.

Articles

1. Monetary Policy Transmission in India: Do Global Spillovers Matter?

This paper by Michael Debabrata Patra, Sitikantha Pattanaik, Joice John and Harendra Kumar Behera employs a dynamic factor model to develop an indicator of global spillovers to examine the impact of unconventional monetary policies on transmission of monetary policy in India. Estimates from a Time-Varying Parameter Vector Autoregression (TVP-VAR) model indicate that monetary policy transmission through money and credit markets is unaffected by global spillovers. In the debt market, however, transmission is impacted, producing occasional overshooting and over-corrections, but market microstructure seems to have a stronger influence and drive mean reversion. Notwithstanding heightened sensitivity of foreign exchange and equity markets to global spillovers, there is no statistically strong evidence of domestic monetary policy losing traction because of global spillovers.

2. Asset Quality and Monetary Transmission in India

This paper by Joice John, Arghya Kusum Mitra, Janak Raj and Deba Prasad Rath, assesses the impact of asset quality of banks on monetary transmission in India. This is attempted through a detailed analysis of determinants of net interest margin (NIM). Using quarterly data for the period (Q1:2010-11 to Q1:2017- 18) and dynamic panel data regression, the study finds that credit risk, proxied separately by gross non-performing assets (NPA) ratio and the stressed assets ratio (NPA plus restructured assets), has a statistically significant and positive impact on the NIM of scheduled commercial banks, suggesting that deterioration in asset quality impeded monetary transmission.

3. Operating Target Volatility: Its Implications for Monetary Policy Transmission

This paper by Rajesh Kavediya and Sitikantha Pattanaik highlights that volatility in the operating target of monetary policy could increase uncertainty about the cost of access to liquidity for any given policy interest rate, thereby pushing up the term premium and long-term interest rates. Empirical estimates of the paper indicate that conditional volatility in daily change in the Weighted Average Call Rate (WACR) - the operating target of monetary policy in India - exerts modest but statistically significant influence on volatility in daily change in other interest rates, namely nominal yields on government papers of three-month, six-month, nine-month, twelve-month, two-year and ten-year maturities. In the credit market, a one percentage point increase in WACR volatility (measured in terms of quarterly standard deviation) is estimated to cause about 26 basis points increase in bank lending rates.

4. Nowcasting Indian GVA Growth in a Mixed Frequency Setup

This paper by Indrajit Roy, Anirban Sanyal and Aloke Kumar Ghosh attempts to nowcast quarterly real non-agricultural Gross Value Added (GVA) growth for India using a dynamic factor model, following two different approaches. Multi-level variable selection using turning-point analysis and elastic-net framework has been adopted to overcome the over-fitting problem while selecting the variables. The paper finds significant improvement in forecast accuracy of one quarter ahead forecast using nowcasting framework as compared with the naïve models. The two-factor model is found to be the most precise when compared with other higher-order factor models and naïve models. The forecast performance improves marginally when stochastic volatility is introduced in the model.

Book Reviews

Apart from the above four articles, this issue of Occasional Papers also contains two book reviews:

• Radheshyam Verma reviews Imad A. Moosa’s “Contemporary Issues in the Post-Crisis Regulatory Landscape” which highlights that the global regulatory landscape for the banking sector has changed dramatically after the global financial crisis, creating hope that banking systems that comply with such regulations should become more resilient and sound in future.

• Sonam Choudhry reviews “The Curse of Cash” written by Kenneth Rogoff, which examines the role of currency in the modern era and how it can constrain monetary policy to deal with recessions.

Jose J. Kattoor
Chief General Manager

Press Release: 2017-2018/2882