“The Future Direction of Monetary Policy Frameworks and Strategies in Emerging Market Economies”

Michael Debabrata Patra

Bank Negara Malaysia

May 21, 2014

*The views expressed in this presentation are not to be attributed to the Reserve Bank of India.

Exchange rate movements defining monetary policy settings

2

Long term yields – EMEs and US

3

0

50

100

150

200

250

300

350

400

Ap

r/2007

Jul/

2007

Oc

t/2007

Jan

/2008

Ap

r/2008

Jul/

2008

Oc

t/2008

Jan

/2009

Ap

r/2009

Jul/

2009

Oc

t/2009

Jan

/2010

Ap

r/2010

Jul/

2010

Oc

t/2010

Jan

/2011

Ap

r/2011

Jul/

2011

Oc

t/2011

Jan

/2012

Ap

r/2012

Jul/

2012

Oc

t/2012

Jan

/2013

Ap

r/2013

Jul/

2013

Oc

t/2013

Jan

/2014

Ap

r/2014

pe

r c

en

t

EMBI-Global Spread as per cent of US 10 year G- Sec Yield

EMBI Spread as per cent of US 10 year G- Sec Yield

QE 1 hints of

QE 2

QE 2 hints of taper

start of

taperOperation

Twist

Yield spreads – India and US

4

4.5

5.0

5.5

6.0

6.5

7.0

0

1

2

3

4

5

6

7

8

9

10

Jan

/13

Feb

/13

Ma

r/1

3

Ap

r/1

3

Ma

y/1

3

Jun

/13

Jul/

13

Au

g/1

3

Se

p/1

3

Oc

t/1

3

No

v/1

3

De

c/1

3

Jan

/14

Feb

/14

Ma

r/1

4

Ap

r/1

4

Ma

y/1

4

pe

rce

nta

ge

po

int

pe

r ce

nt

G-sec Yield Differential

Yield Differential (RHS) USA - 10 year G sec yield

India - 10 year G sec yield

India – Large macro-economic adjustments undertaken

5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

9.5

2009-10 2010-11 2011-12 2012-13 2013-14

pe

r c

en

t

Combined Fiscal Deficit

Centre and States (as per cent of GDP)

5

6

7

8

9

10

11

Ma

r/13

Ap

r/13

Ma

y/1

3

Ju

n/1

3

Ju

l/13

Au

g/1

3

Se

p/1

3

Oc

t/13

No

v/1

3

De

c/1

3

Ja

n/1

4

Fe

b/1

4

Ma

r/14

Ap

r/14

pe

r c

en

t

Key Policy Rates

Repo Rate

Reverse Repo

Marginal Standing Facility

Variable Variation Period

Nominal

Exchange Rate

Appreciated by

13.9 %

August 28, 2013 to

May 16, 2014

REER Appreciated by

4.8 %

August 2013 to

March 2014

CAD (-) 5.6 ppt 2012 Q3 to 2013 Q3

Gold Imports (-) US 5138.7

million

May 2013 to

March 2014

Reserves + US $ 5 billion August 2013 to April

2014

Portfolio Flows +US $ 13.6 Mid-November

2013 to April 25,

2014

India- Potential growth impaired ?....

6

Estimates of future potential growth have been derived from WEO projections for growth and

inflation, using a multivariate filter

5.0

5.5

6.0

6.5

7.0

7.5

8.0

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

pe

r c

en

t

Future Potential Growth - India

....and also in EMDEs more broadly ?

7

Potential growth estimates have been derived from WEO data and projections for growth and

inflation using a multivariate filter

5.0

5.2

5.4

5.6

5.8

6.0

6.2

6.4

6.6

6.8

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

pe

r c

en

t

Potential Growth of EMDEs

EMDEs

Estimates of sacrifice ratio for India

8

Study Methodology Study Period Estimates of

Sacrifice Ratio

RBI (2002) Aggregate Supply Curve Annual: 1975-2000 2

Kapur and Patra

(2000)

Aggregate Supply Curve

(alternative specification) Annual: 1971- 2001 0.3 to 4.7

Patra and Kapoor

(2010) Aggregate Supply Curve

Quarterly: Apr-June’96 to

July-Sept’09 1.1 to 1.7

Patra, M.D et. al.

(2013)

Hybrid Augmented Philips

Curve

Quarterly: Apr-Jun’96 to

Jan-Mar’13 2.4-2.3*

Post-crisis inflation in India – one of the highest among G-20 ?

Time 2009 2010 2011 2012 2013 2014 Jan 2014 Feb 2014 Mar

Argentina 6.3 10.8 9.5 10.0 10.6 ... ... ...

Australia 1.8 2.8 3.4 1.8 2.4 ... ... ...

Brazil 4.9 5.0 6.6 5.4 6.2 5.6 5.7 6.2

Canada 0.3 1.8 2.9 1.5 0.9 1.5 1.1 1.5

China -0.7 3.3 5.4 2.7 2.6 2.5 2.0 2.4

Euro Area 0.3 1.6 2.7 2.5 1.4 0.8 0.7 0.5

France 0.1 1.5 2.1 2.0 0.9 0.7 0.9 0.6

Germany 0.3 1.1 2.1 2.0 1.5 1.3 1.2 1.0

India 9.7 10.4 9.6 9.7 10.1 8.8 8.0 8.3

Indonesia 4.8 5.1 5.4 4.3 6.4 8.2 7.8 7.3

Italy 0.8 1.5 2.7 3.0 1.2 0.7 0.5 0.4

Japan -1.3 -0.7 -0.3 0.0 0.4 1.4 1.5 ...

Korea 2.8 3.0 4.0 2.2 1.3 1.1 1.0 1.3

Mexico 5.3 4.2 3.4 4.1 3.8 4.5 4.2 3.8

Russian

Federation

11.7 6.9 8.4 5.1 6.8 6.1 6.2 6.9

Saudi Arabia 5.1 5.3 5.8 2.9 3.5 2.9 2.8 2.6

South Africa 7.1 4.3 5.3 5.4 5.7 5.8 5.9 ...

Turkey 6.3 8.6 6.5 8.9 7.5 7.8 7.9 8.4

United

Kingdom

2.2 3.3 4.5 2.8 2.6 1.8 1.8 1.7

United States -0.4 1.6 3.2 2.1 1.5 1.6 1.1 1.5

G20 1.8 3.1 4.0 3.2 3.0 2.6 2.3 ... Source: IMF. For India inflation is based on CPI-Combined; data from 2012 based on MOSPI, prior data based on internal backcasted estimates

9

The cost of disinflation

-5.4

-7.2 -7.2

5.9

9.2

10.69.5 9.5

10.09.59.5

8.0

6.0

4.0 4.0 4.0 4.0

6.0 6.0 6.0 6.0

2.0 2.0 2.0 2.0

-10

-8

-6

-4

-2

0

2

4

6

8

10

12

2007

-08

2008

-09

2009

-10

2010

-11

2011

-12

2012

-13

2013

-14

2014

-15

2015

-16

2016

-17

2017

-18

2018

-19

2019

-20

per c

ent

Transition Path to IT

Annual Sacrifice of Growth CPI-Combined (yoy)

Output gap and inflation – coming apart ?

11

CPI-C inflation data prior to 2012 is an estimate based on a backcasted CPI-C series

Output Gap estimates have been derived from WEO data and projections for growth and inflation

9

9.2

9.4

9.6

9.8

10

10.2

10.4

10.6

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

2009 2010 2011 2012 2013

pe

r c

en

t

pe

r c

en

t

Output Gap and CPI-Combined Inflation

Output Gap CPI-C Inflation (RHS)

Demand and supply of reserve assets – future shock ?

12 Source : COFER, Mohan et.al. (2013)

Pro

ject

ions

0

2

4

6

8

10

12

14

16

18

20

20

02

Q1

20

02

Q4

20

03

Q3

20

04

Q2

20

05

Q1

20

05

Q4

20

06

Q3

20

07

Q2

20

08

Q1

20

08

Q4

20

09

Q3

20

10

Q2

20

11

Q1

20

11

Q4

20

12

Q3

20

13

Q2

20

17

US D

olla

rTr

illio

ns

AEs EMDEs All Countries US Monetary Base

Foreign exchange risks and central bank balance sheet

13

0.0

0.6

1.1

1.7

2.2

2.8

3.3

Ap

r-2

013

Ma

y-2

01

3

Jun

-20

13

Jul-2

01

3

Au

g-2

013

Se

p-2

01

3

Oc

t-2

01

3

No

v-2

01

3

De

c-2

01

3

Jan

-20

14

Feb

-20

14

Ma

r-2

01

4

Rs.

Tri

llio

n

Revaluation gains Net Foreign Assets

Summing Up

• Is the era of competitive monetary policy about to ensue ?

• The global long-term interest rate matters much more for monetary

policy choices facing EMEs than a decade ago, suggesting that

monetary policy will never be the same again (Turner, 2014)

• Slowing potential growth – should monetary policy target activity

more explicitly (IMF, 2013) ?

• Inflation and output gap – has the relationship changed ?

Implications for monetary policy ?

• Demand for reserves outstripping supply – sowing seeds of next crisis ?

• Reserves and valuation effects – loss of monetary policy

independence

14

Turner, Philip (2014) ‘The Global Long-Term Interest Rate, Financial Risks and Policy Choices in EMEs’, BIS Working Papers No 441, February.

IMF (2013), ‘Global Impact and Challenges Of Unconventional Monetary Policies’, IMF Policy Paper, October 7.

Thank You !

15