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Financial Markets and Investment Finance in India: Implications for Monetary Transmission

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Monetary Policy in India

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Abstract

The goal of the present chapter is to review the extant literature to summarize and outline the broad contours of the work around monetary transmission channels in India as well as shed light on some of the key features and changes in the Indian financial system with an attempt to broadly link the two. Notwithstanding several changes since 1991, Indian financial markets are still a long way away from being an effective conduit of monetary policy. They do not provide banks with enough competition. Further liberalisation, like FSLRC-proposed changes, may change that.

“We will take steps to improve the transmission mechanism… The question is where we should be as a country. Ideally, a lot of rates should be priced at a market rate… In most countries, you don’t have a situation in which banks decide what rate that should be; it is a market-based rate. We need to move towards that. The corporate sector does not care from where the money is coming as long as it is cheap. So, if banks are not willing to cut rates, the borrower will go to the commercial paper market.”

—Raghuram Rajan, April 2015 in an interview to Business Standard

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Notes

  1. 1.

    The numbers in the table are flow variables. For a given category of firms, the numbers reported in the table are obtained by first calculating the total new funds from each funding source during 2001–2004, expressed as percentage of the total funds from all sources during the same period.

  2. 2.

    IRDA Annual Reports (various years).

  3. 3.

    Report of the Financial Sector Legislative Reforms Commission, p. xiii.

  4. 4.

    The Finance Act 2015, proposes a merger of SEBI and the Forward Market Commission (“FMC”) that presently regulates commodities market.

  5. 5.

    Insurance and Regulatory Development Authority, established under the Act of 1999.

  6. 6.

    Pension Fund Regulatory Development Authority, established under the Act of 2013.

  7. 7.

    Supra note 23, at p. xv.

  8. 8.

    Ibid.

  9. 9.

    Supra note 23 at 106.

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Acknowledgement

The author would like to acknowledge excellent research assistance by Mandar Kagade on an earlier draft of this chapter and extremely valuable comments from the editors and an anonymous referee.

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  1. Wadhwani Foundation, New Delhi, India

    Rajesh Chakrabarti

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  1. Rajesh Chakrabarti
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  1. Economics and Planning Unit, Indian Statistical Institute, New Delhi, India

    Chetan Ghate

  2. Department of Economics, University of California, Santa Cruz, California, USA

    Kenneth M. Kletzer

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Chakrabarti, R. (2016). Financial Markets and Investment Finance in India: Implications for Monetary Transmission. In: Ghate, C., Kletzer, K. (eds) Monetary Policy in India. Springer, New Delhi. https://doi.org/10.1007/978-81-322-2840-0_6

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  • DOI: https://doi.org/10.1007/978-81-322-2840-0_6

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