Monetary Policy Transmission in India

Abstract

K. Kanagasabapathy, Rekha A. Bhangaonkar, and Shruti Pandey address the issue whether the rate and quantum channels were complementary to each other over the period April 2001 to December 2017. Reserve Bank of India’s (RBI) monetary policy framework is characterized by use of multiple instruments combining adjustments in policy rate with a complex use of liquidity management operations, despite changes in the functioning of the monetary policy. They study easing and tightening phases of the policy cycle and bring out stylized facts on several relationships highlighting the impact of policy rate changes and liquidity conditions on short and medium term market interest rates and output and prices. An empirical analysis confirmed the linkage between the repo rate and the market related rates. On the quantum side, a bi-causal relationship is observed between repo and liquidity. Money and financial transmission market transmission is better established than that to the real sector. Shruti Pandey and K. Kanagasabapathy have worked on the revised version for the new edition.