ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Rise and Fall of Industrial Finance in India

Examining the sources of finance for Indian industry, this paper traces the transition from a state-owned and state-dictated financial sector to a regime of financial liberalisation. There are still a number of rough edges to this transition. With the initiation of financial sector reforms and the demise of development banking, there are indications that the industrial sector faces a credit crunch. While newer sources of finance could have compensated for the paucity of bank financing, the exit of development banks before establishing a successful corporate debt market has turned out to be costly for long-term financing. In this context, the experience of the Brazilian Development Bank could serve as a useful model for India.

Financial Sector, Monetary Policy and Budget 2014

The announcements in the union budget relating to the financial sector were incremental in nature and can be seen as a continuation of the policies of the United Progressive Alliance government. A critique.

The Global Crisis and Systemic Risks: Matching Sources with Correctives

Using the literature of pollution control and extending the idea of a Tobin tax, this essay argues that as far as unwanted excessive leverage by financial institutions is concerned, a leverage tax could be thought of. As far as complex financial products are concerned, the solution perhaps lies in transparency and a process of simplification of the products. In handling misrepresentation/fraud, regulatory oversight of products or establishment of effective customer protection agencies could be thought of.

How Do We Assess Monetary Policy Stance?

This paper develops a measure of the monetary policy stance from the detailed reading of various monetary policy announcements in India from 1973 to 1998. According to the proposed measure, the stance of monetary policy has been mildly contractionary over this period with its emphasis on inflation control. The constructed measure of monetary policy stance is then linked to output and prices in a three-variable vector autoregression framework, which indicates that, for the period of study, the potency of monetary policy seemed to have been more effective in price control vis-a-vis stimulating output growth.

Employment and Poverty in India during the 1990s

In an otherwise win-win situation of increasing growth and declining poverty in the 1990s, the phenomenon of jobless growth has been disquieting as well as puzzling. This study focuses on the observed inverse relation between poverty and unemployment, which holds both at the aggregate level as also at various cross-sections. The jobless growth of the 1990s, in general, and more so for agriculture, arguably contained the extent of underemployment and contributed to declining poverty. Continuing employment generation in the unorganised sector, albeit at a decelerated pace, coupled with increasing productivity also played a role. While there has been increasing casualisation of employment, the real wage rate increased sharply amongst casual labourers in rural India, possibly as an offshoot of public employment programmes and declining general prices for agricultural/rural labourers. Interstate remittances, as also those from abroad, could have also made possible the emergent configuration of declining poverty, increasing unemployment and decelerated growth at the state level.

Basel II and Bank Lending Behaviour

The new Basel accord is slated to come into effect in India around 2007 raising the question of how the revised standards will influence bank behaviour. Using a simple theoretical model, it is shown that the revised accord will result in asymmetric differences in the efficacy of monetary policy in influencing bank lending. This will, however, depend on a number of factors, including whether banks are constrained by the risk-based capital standards, the credit quality of bank assets and the relative liquidity of banks' balance sheets. The basic model is empirically explored using data on Indian commercial banks for the period 1996-2004. The analysis indicates that the effect of a contractionary monetary policy will be significantly mitigated provided the proportion of unconstrained to constrained banks in the system is significantly high.

Financial Sector Reforms and the Balance Sheet of the RBI

The conduct of the Reserve Bank of India?s monetary policy in the 1990s has shaped and in turn, been shaped by the programme of financial sector reforms. The operating procedure of monetary policy had to be comprehensively recast to enable the shift from direct to indirect monetary policy instruments in consonance with the increasing market orientation of the economy. This paper examines the impact of financial sector reforms on the balance sheet of the RBI. In the wake of financial sector reforms, we find that a regime switching has taken place in the RBI?s asset size as well as in the size of its surplus. Moreover, the RBI Balance Sheet has become more transparent in line with international accounting standards.

Bank Nominee Directors and Corporate Performance

Banks and financial institutions play a major role in governance of non-financial companies in India through the mechanism of nominee directors. This paper probes two allied issues: firstly, the isolation of the firm specific factors which determine the presence of bank nominee directors on boards and secondly, whether companies, with bank nominee directors exhibit better performance/governance than companies with no banker representation on their boards. A Probit model estimated over a cross-section of Indian manufacturing firms for 2003, indicates that bankers on boards seem to exert a healthy impact on the companies. In fact, large public limited companies are likely to exhibit banker representation, primarily in their role as expertise providers. The evidence from Tobit model reconfirms these results.

Behaviour of Bank Capital

This paper looks at empirically assessing the determinants of risk-weighted bank capital ratios of state-owned banks in India during 1996-2002. Bank-specific characteristics, variables at the banking industry level and general macroeconomic factors have been taken into consideration for this purpose. The findings suggest that bank specific factors play an important role in influencing bank capital ratios in India.

Stock Market Integration and Dually Listed Stocks

In search of the micro-foundation of the commonly held view of a dominant Nasdaq and satellite Bombay Stock Exchange (BSE), the study looks into the price interdependence of 10 Indian companies, which have floated American Depository Receipts (ADRs). The strong correlation between the prices of the dually listed stocks is corroborated by the finding of a bidirectional causality in a vector auto regression model. The competing domestic stock exchange, viz, National Stock Exchange (NSE) too is found to share the same bidirectional relation scripwise with the Nasdaq/New York Stock Exchange. Furthermore, the impulse responses pattern indicates that a positive shock in the domestic (international) price of a scrip gets transmitted in terms of a strong positive movement in the international (domestic) price the very next day. Thus, the quotes of both the markets share not only a stockwise bidirectional causality, but markets also are efficient in processing and incorporating the pricing information.

Does Monetary Policy Have Differential State-Level Effects?

The paper examines whether monetary policy has similar effects across major states in the Indian polity. Impulse response functions from an estimated Structural Vector Auto Regression (SVAR) reveal two sets of states: a core of states that respond to monetary policy in a significant fashion vis-à-vis others whose response is less significant. The paper attempts to trace the reasons for the differential response of these two sets of states in terms of financial deepening and differential industry mix.

BSE and Nasdaq

The synchronised movement of BSE and Nasdaq has often been interpreted as an indication of integration catching up with the Indian financial markets. The authors have looked into the nature of relationship between the daily share price in BSE and NSE on the one hand and Nasdaq and New York Stock Exchange on the other, for 1999-2000 through 2000-2001 and have found a unidirectional causality from Nasdaq to BSE or NSE. The relationship as well as direction of causation also holds good for the technology segment of the New York Stock Exchange and BSE or NSE. However, domestic prices of technology stocks and overall domestic share prices were found to be independent of each other.


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