MONEY, BANKING AND FINANCE
Reflections on Indian Financial Markets
Partha Ray
I
t may not be an exaggeration to say that the recent past of
the Indian monetary and financial sector has been marred
by a number of not so encouraging occurrences. A governor of
the Reserve Bank of India (RBI) resigned abruptly citing personal
reasons, select senior officials of Indian banks (both private and
public) dominated the newspaper headlines on issues related to
integrity, there were complaints of lack of pick-up in credit growth
that accentuated in the aftermath of a major liquidity crisis in a
leading non-banking financial company (NBFC), the Indian rupee
experienced some roller-coaster dive. And the list could go on. It is
at this juncture that this special issue on money, banking and fi-
nance—through its five papers—looks into some such issues and
beyond, in an effort to decipher the sublime from the mundane.
The first paper by Y V Reddy takes a look at the central banking
in India both retrospectively and prospectively. The author nar-
rates the post-independence experience of the central bank in
India in terms of four distinct phases, namely, 1950 to 1970, 1970
to 1990, 1990 to 2010, and post 2010. With the primacy of the
planning process, Reddy has characterised the period from 1950
to 1970 by planned fiscal dominance, a trend further accentuated
between 1970 and 1990 with an inward-looking bias in both
the fiscal and the financial sectors. The period of 1990 to 2010
evidenced differences arising between the RBI and the Govern-
ment of India in the areas of monetary management and external
sector, despite both having partnered in crisis management and
reforms of the financial sector. In the aftermath of the global
financial crisis, the period since 2010, however, is broadly char-
acterised by the rebalancing and adoption of a new framework,
that is, inflation targeting. Referring to the recent stand-off
between the RBI and the government, Reddy notes,
The immediate future of central banking in India depends not only on
how it equips itself to face the complex unclear challenges but also on
the manner in which the current concerns relating to fiscal manage-
ment, public sector ownership, external sector balance and coordina-
tion functions are resolved by the Government.
In the second paper, Ashima Goyal probes into the dynamics
behind the sharp rise in interest rates on the Indian government
securities (G-secs) during 2017–18, which was seemingly
unrelated to the fundamentals. Goyal notes that the standard
variables like domestic growth, inflationary expectations or fiscal
deficit, as well as the movements of the United States’ federal
funds rates fail to explain this phenomenon. Relating to the
importance of liquidity and its composition for G-Sec yields, her
empirical results indicate the large impact of open market opera-
tion (OMO) of the RBI on 10-year G-Secs. In particular, her results
point towards the phenomenon that, “If large foreign debt inflows
reduce OMOs, as sterilization takes place, they can raise yields.”
Economic & Political Weekly EPW MARCH 30, 2019 vol lIV no 13
The relationship between the banks and the NBFCs has
acquired significance in recent times. Wasim Ahmad, Bhaskar
Pathak and N R Bhanumurthy in their paper, “Understanding
Systemic Symptoms of Non-banking Financial Companies,”
look into the nature of the interconnectedness between these
institutions. Using the weekly data for 31 Indian banks and
17 enlisted NBFCs, they calculate a state-of-the-art measure
of interconnectedness at the 1% tail quantile. While tracking
the broad temporal trends in the aggregate interconnected-
ness, their results also indicate a hierarchy of various specific
institutions that are more interconnected than others.
Since the mid-2000s, there have been various changes in the
monetary policy operating procedure and the liquidity man-
agement framework in the country. Illustratively, by mid-2011,
fixed overnight policy repo rate emerged as a single policy rate
with the weighted average of call money rate as the operating
target. Subsequently, India adopted a flexible inflation target-
ing framework by mid-2016. Edwin Prabu and Partha Ray in
their paper on monetary policy transmission across various
segments of the Indian financial markets examine the impact
of such changes on money, G-Sec, corporate debt, foreign ex-
change, and the equity markets. The findings indicate suffi-
cient period-specificity of transmission of monetary policy
across different segments of financial markets. While the trans-
mission is found to be fast and efficient for the money and bond
markets, the impact of the policy rates on the foreign exchange
and stock markets is rather limited.
In the last paper, “Financial Literacy and Financial Inclusion:
Unbundling the Nexus,” Saibal Ghosh explores the question of
whether financial literacy has any bearing on financial inclu-
sion. Using district-wise data on Financial Literacy Centre
(FLC) and household-level data (from the Financial Inclusion
Insights Survey), Ghosh in his paper finds that while the FLCs
influence the use of bank accounts as compared to their ac-
cess, the well-capitalised banks with lower problematic loans
are better placed to deliver financial inclusion through their
FLCs. Interestingly, notwithstanding the growing importance
of the electronic channels, traditional channels still remain
relevant in impacting financial inclusion, positively.
Partha Ray (pray@iimcal.ac.in) is with the Economics Group, Indian
Institute of Management Calcutta, Kolkata.
This special issue has been put together by Partha Ray who
oversaw the commissioning, refereeing and the final selection of
the articles. EPW is grateful to him for being the Advisory Editor
for this issue. —Ed.
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34 MARCH 30, 2019 vol lIV no 13 EPW Economic & Political Weekly