May 3, 2018

The RBI paper broadly focuses on the point that Indian markets pay more focus on country’s fiscal fundamentals and largely ignore the global financial vulnerabilities.

The RBI’s monetary policy is largely insulated of global spillovers including most of the policy decisions made by the US Federal Reserve, an RBI occasional paper said. “Heightened sensitivity of foreign exchange and equity markets to global spillovers notwithstanding, there is no statistically strong evidence of domestic monetary policy losing traction because of global spillovers,” the paper by RBI staff said. The latest paper was part of the RBI Occasional Papers, in which central bank’s staff members contribute. These occasional papers reflect views of the authors and are not RBI’s official views.

The paper broadly focuses on the point that Indian markets pay more focus on country’s fiscal fundamentals and largely ignore the global financial vulnerabilities.

“The empirical results indicate that monetary policy transmission through the money market — the first leg of transmission — has improved substantially over time and is found to be almost complete even in the face of global spillovers. In the debt market, however, global spillovers affect transmission of monetary policy to yields and can even produce overshooting and over-corrections, but domestic factors such as market microstructure have a stronger influence,” the paper added.

High NPAs affect monetary policy transmission

The rising non-performing assets in the Indian banks have largely impaired the monetary policy transmission in India, the paper also said. The paper assesses the quarterly data of banks between April 2010 and June 2017.

“The key findings of the study are that deterioration in the health of the banking sector at the initial stages impairs monetary transmission through interest rate channel as banks are able to charge extra credit risk premium for possible loan losses. However, when NPAs keep rising, banks are unable to protect their net interest margins (NIMs) due to competitive pressures, but they become risk averse and cut sharply their lending, which impacts monetary transmission through bank lending channel,” the paper said.

[The Financial Express]