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The present study examines the long-run and short-run e¤ects of monetary factors (money supply, interest rate, inflation, and foreign currency exchange rate) on the Indian stock market. The study uses sophisticated econometric tools to analyse monthly observations from January 1993 to December 2019. The Augmented Dickey Fuller (ADF) test indicates that the variables involved in the present study are either I(0) or I(1). The Bai-Perron multiple break point test identifies four breakpoint dates in the Indian stock market index series. The breakpoint dates are incorporated as di¤erent dummy variables in the ARDL-ECM regression. The F-bounds test reveals that the variables in the study are cointegrated within the time period under consideration. Our findings show that the interest rate, which is a proxy for monetary policy instrument, and the foreign currency exchange rate have a negative impact on the Indian stock market both in the long-run and short-run. Furthermore, we find that structural changes significantly a¤ect the performance of Indian stock market. The study covers a long period of time, which the majority of previous work did not consider. Furthermore, the study uses di¤erent dummy variables in the ARDL model to represent structural breaks (as determined by the Bai-Perron multiple break point test). [ABSTRACT FROM AUTHOR]

The active participation of the central bank in exchange rate management has accelerated the growth of foreign exchange reserve in India. The massive reserve stockpiling has substantially contributed to apprehensions about excess liquidity in the domestic economy. The extent to which these concerns are justified depends on the degree to which the central bank is able to mitigate its effects on monetary aggregates. This study is an attempt to assess the magnitude of the sterilization coefficient by using quarterly data from 1996 to 2019. In order to estimate sterilization and offset coefficients, the study employed the two-stage least squares (2SLS) method under the theoretical framework of simultaneous equation modelling. The findings show that the reserve accumulation through central bank interventions puts pressure on money supply. However, the RBI sterilization policy was effective as the central bank was able to sterilize 93 percent of its interventions, while the offset coefficient was 72 percent during the period of study. The low value of the offset coefficient compared to the sterilization coefficient indicates a high degree of monetary policy independence in neutralizing the central bank's purchase interventions. Based on the findings, it can be recommended that policymakers should consider the sustainability of interventions and sterilization operations as the dual policy objectives of independent exchange rate management and monetary policy cannot be achieved in the presence of a high interest rate in an inflation-targeting regime. [ABSTRACT FROM AUTHOR]

Globalization of the early 1990s is thought to have caused the loss of monetary-policy independence in India. I find that Indias monetary-policy independence is anchored in the exchange-rate regime along with its state of foreign-exchange reserves, and not necessarily in globalization per se. India significantly followed US interest rates even in the absence of globalization in the 1960s when the country faced foreign-exchange constraints and maintained a fixed exchange rate. From the mid 1970s to the early 1990s, India exercised monetary-policy independence under a floating exchange-rate regime. The loss of monetary-policy independence since the early 1990s is not attributable to globalization per se, but mainly to the stable exchange-rate policy of India, which heavily resembles the policy of the 1960s. [ABSTRACT FROM AUTHOR]

The purpose of this paper is to re-examine the empirical relationship among alternative monetary aggregates (Ml and M2), output, prices, interest rates and exchange rates in India. The results of a five-variate vector error correction model are indicative of a bi-directional causality between each of the monetary aggregates and prices. Our findings of a feedback relationship make each of the monetary aggregates a poor intermediate target and informational variable. Moreover, contrary to most recent research in this area, the results are supportive of the real business-cycle view and the Keynesian monetary accommodation hypothesis rather than the monetarists' theory of the business cycle. [ABSTRACT FROM AUTHOR]