Nomura launches RBI Policy Signal Index

Moneylife Digital Team 25 January 2016

Nomura's NRPSI sees the RBI delivering a final 25bp rate cut in its post-budget policy meeting in April 2016. However, an earlier inter-meeting cut cannot be ruled out

Nomura has launched a new index called Nomura RBI Policy Signal Index (NRPSI), which it says quantifies the relative probability of monetary policy easing versus tightening using a range of macroeconomic indicators such as growth, inflation, financial and external parameters.

According to Nomura, the NRPSI can signal both the direction of monetary policy and the potential for a larger-than-normal rate action. It says, "We find that, in addition to growth and inflation, the Fed funds rate, oil prices, global growth and exchange rates are significant drivers of the RBI’s policy decisions."

"Currently, the NRPSI is predicting more easing, which is consistent with the RBI’s accommodative policy stance. In our baseline, we expect the RBI to deliver a final 25bp rate cut in its post-budget policy meeting in April 2016. However, an earlier inter-meeting cut cannot be ruled out," Nomura added.

Nomura says the NRPSI has three advantages over typical Taylor-rule type estimates, which suffer from drawbacks such as real-time assessment of the neutral real rate and potential growth.

"First, since the NRPSI is based on the observed responses of the RBI to changing macro dynamics, it does not require any express assumptions on the real rate or other factors. Second, the NRPSI is useful in measuring the net direction of policy change (accommodative, neutral or contractionary) despite contrasting signals from macro data (e.g., weak growth but a high current account deficit); and third, it can be used to gauge the potential for a larger-than-normal (>25 basis point) policy action," it added.

Comments

User

MG Warrier

1 decade ago

Interesting INDEX.Those who are research-oriented can think of indexes for the several variables, Nomura says will influence RBI decision. There could be indexes for the 'strength' of GOI-RBI relationship and for the amenability of monetary policy to expectations of finance ministry from time to time.