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The IUP Journal of Management Research

The Relation Between Policy Rates and Exchange Rates: An Indian Perspective

Article Details

Pub. Date	: Apr, 2019
Product Name	: The IUP Journal of Management Research
Product Type	: Article
Product Code	: IJMR11904
Author Name	: C N M Lavanya and Shivappa
Availability	: YES
Subject/Domain	: Management
Download Format	: PDF Format
No. of Pages	: 16

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Abstract

There is an inextricable link between money market and foreign exchange (forex) market. The policy rates of India consist of the repo and reverse repo rates, in addition to the Marginal Standing Facility (MSF) rate and bank rate. This study examines the changes (hike/reduction) in policy rates against the backdrop of the prevalent global and domestic scenarios. It also maps the changes in spot rates of Indian Rupee-US Dollar (INR-USD) and Indian Rupee-Euro (INR-EUR) and the forward premium/discount of 1-month USD for the time period January 2011 to September 2016. It elaborates the spread analysis for the repo rate and reverse repo rate on the one hand, and MSF rate and bank rate, on the other. The repo rate has a high degree of correlation with reverse repo rate and a moderately high degree of association with MSF rate. Bank rate and MSF rate have been closely aligned for some time now.

Description

The Reserve Bank of India’s (RBI)’s stance of monetary policy has been conditioned by the growth-inflation dynamics, placed against the backdrop of globally uncertain economic milieu.

Against the backdrop of the prevalent global and domestic scenarios, the present study elaborates the spread analysis for the repo rate and reverse repo rate on the one hand, and MSF rate and bank rate, on the other. It also studies the changes in the policy rates vis-à-vis those in spot exchange rates against US dollar and euro, for the time period January 2011 to September 2016.