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Monetary policy and exchange rate pass-through in India

Author

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  • Bhavish SHARMA

    (Narsee Monjee Institute of Management Studies (NMIMS), Bengaluru, India)

Abstract

The paper tests the causality between monetary policy and exchange rate based on data from 1991 onwards as that was when India opened up the economy. According to theory, interest rates are inversely related to exchange rates with the main linkage between them being capital flows. External debt also has considerable effects. The paper uses trend-line and regression analysis to test the impact of various regressors on the dependent variable exchange rate. The paper finds that the monetary policy is not as effective as theory would suggest in its ability to control the exchange rate and that the pass-through from repo rate to exchange rate is not complete. The paper provides suggestions for improving the linkage or pass-through as well as suggest usage of other policies in tandem with monetary policy of RBI for India to achieve the economic objectives for long-term growth as well as tackling potential short-term crises.

Suggested Citation

  • Bhavish SHARMA, 2020. "Monetary policy and exchange rate pass-through in India," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania / Editura Economica, vol. 0(4(625), W), pages 275-288, Winter.
    • Handle: RePEc:agr:journl:v:4(625):y:2020:i:4(625):p:275-288
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    References listed on IDEAS

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    1. Jugnu Ansari & Ashima Goyal, 2014. "Bank Competition, Managerial Efficiency and the Interest Rate Pass-Through in India," Contemporary Studies in Economic and Financial Analysis, in: Risk Management Post Financial Crisis: A Period of Monetary Easing, volume 96, pages 317-339, Emerald Group Publishing Limited.
    2. Takatoshi Ito & Kiyotaka Sato, 2008. "Exchange Rate Changes and Inflation in Post‐Crisis Asian Economies: Vector Autoregression Analysis of the Exchange Rate Pass‐Through," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(7), pages 1407-1438, October.
    3. Yunus , Mohammad, 2001. "Monetary Interpretation of Exchange Rates in the South Asian Countries," Bangladesh Development Studies, Bangladesh Institute of Development Studies (BIDS), vol. 27(1), pages 73-103, March.
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