Monetary Policy Transmission in Financial Markets: The Case of India

Abstract

The paper looks into the monetary policy transmission across different segments of the financial market in India from May 2011 to March 2018. It studies the effect of two instruments ie, policy rate and a composite index ( score) comprising of quantity instruments and policy rates on the money market, govt. securities market, foreign exchange market and the stock market using VAR analysis. The results show that monetary transmission is fairly quick in the money market and other interest rates of short maturity compared to interest rates of longer maturities. The impact on interest rates is an appreciation for the policy rate but a depreciation followed by an appreciation for the composite index. Lastly the effect of policy rate and composite index on the sensex is negative.