RBI policy relatively insulated: Staff paper
Monetary policy in India is largely independent of spillovers from unconventional global monetary policy, says a paper from Reserve Bank of India (RBI) staff.
“Heightened sensitivity of foreign exchange and equity markets to global spillovers notwithstanding, there is no strong evidence of domestic monetary policy losing traction because of global spillovers,” said the paper. It is authored by Michael Patra, Sitikantha Pattanaik, Joice John and Harendra Behera.
Patra is an executive director at RBI and member of the sixmember Monetary Policy Committee. He has advised rate hikes several times against the other members voting for a pause, or even a cut. The other three are advisors to the monetary policy department.
“Monetary policy transmission through the 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 drives mean reversion,” said the paper.
Staff papers are not RBI's official views.
In India, recent international developments moved bond yields only thrice - during the global financial crisis, when the US Fed decided to shrink its balance sheet in 2013, and during the rise in German bond yields.
“During the first two of these episodes, however, government security bond yields reflected the domestic monetary policy stance, which adjusted to insulate domestic macroeconomic conditions and successfully so,” the paper said.
The broad consensus seems to be that when markets are on edge, they pay greater attention to countryspecific fiscal fundamentals, rather than global correlations. In the short run, financial vulnerabilities might matter in spread formation.
India's domestic policies have insulated the market. Less than 5 per cent of the country's domestic bonds are held by foreign investors. Unlike other emerging markets, Indian companies have not heavily invested in dollardenominated debt.
In India, unlike some emerging markets, changes in short-term domestic interest rates appear the lead driver of changes in nominal government security (G-sec) yields.
“Corporate bond yields essentially track the 10-year G-sec yield, with changing risk spreads over time. But for occasional deviations of risk spreads from normal levels, the evolution of bond yields is consistent with domestic monetary policy cycles,” the paper noted.
In India, the credit market is also unaffected by unconventional monetary policies, it says. However, “in the 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,” it said.