Measuring Monetary Policy Shocks in India

Abstract

We present new measures of monetary policy shocks for India using high-frequency data, creating a publicly available event study dataset as a byproduct. In addition to capturing surprises to the Reserve Bank of India's (RBI) policy rate, our shocks suggest that financial markets infer substantial information about the future path of the policy rate from RBI communication. We conduct a narrative analysis of official statements and corresponding media discussion on prominent RBI announcement dates to help understand how markets use RBI communication to update their expectations. Bond and stock markets react strongly to these monetary shocks, but exhibit notable heterogeneity across governor regimes. Finally, we use the monetary shocks as external instruments to identify the impact on macroeconomic variables in a structural vector autoregression. We find some evidence of the conventional transmission of monetary policy to prices but not to output.