Impact of US monetary policies on Indian economy

Abstract

Over the past 2-3 decades as we have seen the increasing integration of the Indian economy into the globally economy. The integration into the global economy has increased the interdependence of the domestic economies on other countries with varying impact. The advance economies have a high impact on the domestic economy compared to the emerging economies, especially the U.S., given its size and dependence of the global economy on its currency. Global capital flows are mainly driven by U.S. monetary policy, a change in U.S. monetary policy can result in monetary conditions that are inappropriate for the cyclical conditions of recipient domestic economies. A boost to domestic demand from more comfortable monetary conditions will complicate domestic policy matters if the economy is already operating above capacity. In this project, we study the sensitivity of the Indian economy to the U.S. monetary policies. Our analysis in the project is based on the paper "Reserve Adequacy Explains Emerging-Market Sensitivity to U.S. Monetary Policy". It analyses the sensitivity of the U.S. monetary policies on the emerging market with a special study of Argentina and Turkey. In this, our analysis is on focused on the Impact of U.S. monetary policies on the Indian economy. The analysis is carried out using last decade data CEMBI India, US 10-year treasury bond yield rate, U.S. Federal reserve rate and Reserve adequacy ratio of India.