The Effect of World Markets on Indian Policy Rates

Abstract

The study investigates the relationship between Indian Policy rates and Market indexes of the largest economies of the world, including the U.S., the U.K., Germany, France, and Canada, for the 10 years from January 2002 to September 2012. The results indicate that the short-term lending to banks by the Reserve Bank of India (RBI) varied more rapidly with the market indexes of America compared to European market indexes, but long-term lending to banks by RBI varied more rapidly with the market indexes of Europe than American market indexes in the past 10 years. It was also found that long-term lending by RBI was more dependent on the world’s largest market indexes than was short-term lending by RBI.