Traditionally, monetary policy aims at promoting growth, achieving full employment, smoothing business cycles, averting financial crisis and stabilizing long-term interest rates and real exchange rates. Ideally, it would have made greater sense had central banks had a single overwhelming objective of price stability. Ideally, it would have made greater sense had central banks had a single overwhelming objective of `price stability'. But price stability, unfortunately, is not defined by any one single macroeconomic indicator, but is an outcome of the combined effect of a variety of economic phenomenon such as money supply, interest rates, exchange rates, growth in economy and business cycles, and hence the concern of monetary policy for these many issues.

There are indeed three equilibrium processes in the macroeconomy that operate simultaneously, which are of significance in ensuring price stability. In the real market, the level of aggregate output changes until it is equal to the level of aggregate demandproducers change their output levels to such levels where it meets what customers wish to buy. In the money market, the level of interest rates changes until wealth holders are satisfied with the form of their wealthfor instance, if investors prefer greater degree of liquidity, they will sell their assets for money, which causes fall in asset prices and rise in interest rates, and vice versa. The third equilibrium refers to the price levelif the demand for output is not equal to the quantity produced, changes in prices and changes in output take place until they are equal. Similarly, the exchange rate is also determined by an equilibrium process, provided the currency is freely floating.

Now, the important thing to be remembered here is that each of the three equilibrium processes tends to disturb each of the other twofor instance, as the level of income moves towards its equilibrium, it changes the level of demand for money, which changes the level of interest rates. It also changes the level of aggregate demand, which, in the event of supply schedule not being horizontal, will change the price level. As the level of interest rates moves towards its equilibrium, it changes the level of investments, which results in a multiplied change in income. Here again, if supply schedule is not horizontal, change in income levels results in change in price level.

That being the whole gamut of interdependence of macroeconomic equilibria and constraints thereof that need to be managed by the Reserve Bank of India (RBI) by drafting appropriate monetary policy to ensure `price stability', the need for knowing the past performance of the economy and the impact of the monetary policies with all certainty hardly needs to be stressed. Against this backdrop the author, Anuradha Patnaik, of the first paper"Measuring the Efficacy of Monetary Policy in India Using a Monetary Measure"has empirically assessed the efficacy of monetary policy in stabilizing prices and ensuring growth in the post-reform era (1999) by constructing narrative monetary measure as a representative of the monetary policy stance and using statistical tools, viz., IRF, and FEVD of VAR, inferred that monetary policy has very little impact on price stability and growth. These results are however, contradicting the findings of Bhattacharya and Ray (2007), according to whom the monetary policy adopted during 1973-1998 was more effective in price control. It is therefore necessary to undertake a more rigorous study by adopting a more inclusive measure of the output. Incidentally, it makes sense to bear in mind here that we still have a parallel economy in operation whose output does not reflect well in our statistics. In any case, it is essential that the impact of monetary policies needs to be constantly evaluated with larger data and more variables, at regular intervals, for making future policies more effective and meaningful.

In today's world of knowledge economy, it is no longer felt sufficient to measure the efficiency of a business merely on financial terms, for it does not reflect fully well the value of a firm to its stakeholders. And it is more so in industries like banking which heavily rely on human capital to delight the customer by offering the required services/products. Indeed, leveraging on debt, managing the risk thereof, and delivering returns to the shareholders being an intellectual activity, banks need to factor the intellectual capitalthe "knowledge that can be converted to value"into their valuations. Intellectual capital essentially entails three elements: human capital, structural capital and customer capital/relational capital, and it is the management of these three put together that in fact delivers dividends to the shareholders. Against this backdrop, the author, G Bharathi Kamath, of the second paper, "Intellectual Capital Efficiency Analysis of Indian Private Sector Banks", has made an attempt to estimate and analyze the value-added intellectual coefficient of select Indian private sector banks for a period of five years based on their published profit and loss account and balance sheet from 2002 to 2007 and using the Value Added Intellectual Coefficient (VAIC) measured their value-based performance. The author has also discussed the implication of such valuation for the sustainability of banks' performance. This novel approach to rank the performance of a select group of banks throws open a new line of research that needs to be further explored with more rigor.

In order to ensure that the banking system operates crisis-free, the Basel Committee on Banking and Supervision has recommended adoption of capital adequacy norms for banks based on their risk-weighted asset exposures, which are popularly known as Basel I. These recommendations were adopted by India with effect from 1992-93. This Accord was however criticized, for it had not factored in certain risks, such as market risk and operational risk owing to which it was found to be inadequate to maintain financial stability across the globe. Against this backdrop, the authors, Jahar Bhowmik and Soumasree Tewari of the paper, "Basel Accord and the Failure of Global Trust Bank: A Case Study", have attempted to analyze the competency or otherwise of the Basel norms to mitigate the crisis in the Global Trust Bank (GTB) and concluded that it has failed in arresting the crisis, for the Accord has not taken into consideration the operational risk, which incidentally was found to be the main cause of the liquidation of the Global Trust Bank.

Next, moving on to the payment of dividends by banks in India, we have M Sudhahar and T Saroja, who in their paper"Determinants of Dividend Policy in Indian Banks: An Empirical Analysis"have attempted to identify the trends and determinants of the dividend payout policies of banks in India, by studying the data for 10 years from 1997-98 to 2006-07 and subjecting it to different statistical scrutiny and presented their findings. In the last paper of the issue, "Assessing the Effect of Ownership on the Efficiency of Indian Domestic Banks", its authors, Sunil Kumar and Rachita Gulati have assessed the effect of ownership, if any, on the efficiency of Indian banks using Data Envelopment Analysis technique and concluded that ownership does not matter in defining the efficiency of Indian banks.

-- GRK Murty
Consulting Editor