Summary: The background papers for the 2015 Article IV explore key issues affecting the Indian economy, and implications for fiscal, monetary, financial sector and other structural policies. The first chapter examines how surges in global financial market volatility (including those triggered by uncertainties about monetary policy normalization in advanced economies and/or geopolitical tensions) spill over to emerging market economies (EMs) including India. The results suggest that a surge in global financial market volatility is transmitted very strongly to key macroeconomic and financial variables of EMs, and the extent of its pass- through increases with the depth of external balance-sheet linkages between advanced countries and EMs. The second chapter looks at food inflation, which has often been singled out as a key driver of India’s high and persistent inflation. India’s food inflation developments over the past decade appear to have reflected demand pressures driven by strong private consumption growth, which have often outpaced supply of key food commodities. Accordingly, supply side measures that will contain food inflation pressures on a durable basis remain critical to provide a robust foundation for the adoption of a low-inflation objective. The third chapter employs a dynamic multi-country framework to analyze the macroeconomic transmission of El Niño weather shocks to India. The results show that India faces a short-lived fall in economic activity, as well as moderate inflationary pressures, as a consequence of an El Niño-based weather shock. The fourth chapter examines monetary policy transmission in India, focusing on the interest rate and credit channels of transmission. The results indicate there is significant, albeit slow, pass-through of policy rate changes to bank interest rates. Furthermore, adjustment to monetary policy appears to be asymmetric: deposit rates adjust downwards in response to loosening but not upwards in response to tightening, while the lending rate adjusts more slowly to loosening than to tightening. The fifth chapter examines India’s experience with fiscal rules. It outlines the main features of the Fiscal Responsibility and Budget Management Act (FRBMA), which was placed in abeyance following the 2008 global financial crisis. A discussion of possible modifications for a successor arrangement is also provided, drawing from international experience with fiscal rules. The sixth chapter estimates the short- and long-run price and income elasticities of Indian exports, and investigates the role of structural rigidities in shaping export demand for Indian goods. While Indian exports respond positively to exchange rate depreciation in the short term, binding supply-side constraints dampen this responsiveness. This underscores the importance of exchange rate flexibility as a shock absorber, including in responding to external demand shocks. Policies to improve labor market flexibility can also help enhance India’s exports in the long run.

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