RBI's Monetary Policy, Fiscal Deficits and Financial Crowding Out in India: An Empirical Investigation

Lekha Chakraborty ()
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Lekha Chakraborty: National Institute of Public Finance and Policy

Working Papers from National Institute of Public Finance and Policy

Abstract: Using high-frequency macrodata from a financially deregulated regime, the paper examines whether there is any evidence of financial crowding out in India. The macroeconomic channel through which financial crowding out occurs is the link between the fiscal deficit and interest rate determination. Using ARDL models, it is established that the interest rate is affected by inflationary expectations, not by the fiscal deficit. The term structure of interest rates in India is also incorporated into loanable fund models to analyze the transmission mechanism of the links between long-term and short-term interest rates, which is found to be affirmative, and the financial markets in India are not highly segmented. This result has significant policy implications for interest rate determination in India, especially when fiscal policy has remained accommodative for economic growth recovery through high public capital expenditure investment.

Keywords: fiscal deficit; interest rate determination; asymmetric vector autoregressive model; financial crowding out (search for similar items in EconPapers)
JEL-codes: C32 E62 H6 (search for similar items in EconPapers)
Pages: 17
Date: 2024-07
New Economics Papers: this item is included in nep-cba and nep-mon
Note: Working Paper 414, 2024
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Persistent link: https://EconPapers.repec.org/RePEc:npf:wpaper:24/414

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