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

Articles by Sitikantha PattanaikSubscribe to Sitikantha Pattanaik

Taming Inflation by Anchoring Inflation Expectations

By firmly anchoring inflation expectations, monetary policy can prevent a wage-price spiral and moderate the second-round effects of supply shocks, thereby avoiding an inferior macroeconomic outcome of lower growth and higher inflation.

Interest Rate Defence of Exchange Rate

While the rationale for raising the interest rate to defend an exchange rate under speculative attack is well grounded in economic and financial theories, empirical validation of the effectiveness of such a policy stance has generally been difficult and is shrouded with conflicting findings. In India, besides forex market interventions and use of several administrative measures, the Reserve Bank of India has occasionally resorted to the high interest rate option during major episodes of significant pressures on the external value of the rupee. An empirical assessment suggests that one standard deviation shock to the call rate leads to rupee appreciation in the very second month. Similarly, for one standard deviation shock to net interventions, the exchange rate appreciates gradually by a few paise over five months. The impulse response also suggests that in response to one standard deviation shock the exchange rate appreciates by about 8 paise in the second month, but subsequently the exchange rate depreciates gradually, more than offsetting the initial impact of the hike in interest rate.

Measuring Cost of Capital

This paper highlights the complexities associated with the estimation of hurdle rates in emerging market economies and explores whether credit ratings could be used as an alternative to global CAPM for estimating equity cost of capital for valuation of projects in such economies. By adopting the log-linear country credit rating model, this paper estimates the cost of capital for 136 countries, with or without equity markets. India's low stock return correlation with the return on the global index indicates that if the residents are permitted to hold a globally diversified portfolio, they could significantly reduce their exposure to unsystematic risks. Without this the cost of equity capital (which should compensate only for systematic risk) may be higher.

Target and Instruments for the External Sector with an Open Capital Account

with an Open Capital Account Sitikantha Pattanaik The move to a market-determined exchange rate system alongside surges in private capital flows has constrained the authorities from using the exchange rate essentially as an instrument since ensuring a stable/non-appreciating exchange rate has become an objective in itself The sacrifice of monetary independence resulting from large intervention pursued with a view to preventing significant real appreciation has brought to the fore the government's commitment to a sustainable level of current account deficit. But the conduct of exchange rate policy whether to use the exchange rate as an instrument or a target -has turned increasingly complex. Consistently preventing the exchange rate from settling at levels justified by market forces may emerge as a major stumbling block in furthering the process of liberalisation of capital account transactions.

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