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Policy transmission in Indian money markets: The role of liquidity

Author

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  • Ashima Goyal

    (Indira Gandhi Institute of Development Research)

  • Deepak Kumar Agarwal

Abstract

We derive testable implications for transmission from Indian policy rate and liquidity provision to market rates as well as the interaction between rate and liquidity channels, from an analysis of operating procedures and estimate using event window regressions. The interest rate transmission channel is dominant, but the quantity channel has an indirect impact on the size of interest rate pass through. Short run government securities (G-Secs) yields are most responsive to changes in policy rates. Asymmetry or faster and more adjustment during tightening is found only for G-Secs rates. Liquidity changes matter for short term rates and durable liquidity for longer term government securities. Collateralized short-term market rates respond to the direction of change in Repo when liquidity changes are aligned. These or short-run G-Secs should form the operating target. Liquidity variables increase the size of the G-Secs Repo coefficients, suggesting aligned liquidity increases the impact of a change in the Repo Rate. The results highlight an important asymmetry in monetary transmission for emerging markets in the special role of liquidity in comparison to rates. Implications follow for policy.

Suggested Citation

  • Ashima Goyal & Deepak Kumar Agarwal, 2019. "Policy transmission in Indian money markets: The role of liquidity," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2019-027, Indira Gandhi Institute of Development Research, Mumbai, India.
    • Handle: RePEc:ind:igiwpp:2019-027
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    File URL: http://www.igidr.ac.in/pdf/publication/WP-2019-027.pdf
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    References listed on IDEAS

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    1. Xavier Freixas & Antoine Martin & David Skeie, 2011. "Bank Liquidity, Interbank Markets, and Monetary Policy," The Review of Financial Studies, Society for Financial Studies, vol. 24(8), pages 2656-2692.
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    7. Barendra Kumar Bhoi & Arghya Kusum Mitra & Jang Bahadur Singh & Gangadaran Sivaramakrishnan, 2017. "Effectiveness of alternative channels of monetary policy transmission: some evidence for India," Macroeconomics and Finance in Emerging Market Economies, Taylor & Francis Journals, vol. 10(1), pages 19-38, January.
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    Cited by:

    1. Md Gyasuddin Ansari & Rudra Sensarma, 2021. "Monetary Policy, Interbank Liquidity and Lending Behaviour of Banks in India," Working papers 442, Indian Institute of Management Kozhikode.
    2. Ashima Goyal, 2021. "What does the COVID-19 experience tell us about Indian growth drivers?," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2021-025, Indira Gandhi Institute of Development Research, Mumbai, India.
    3. Ashima Goyal, 2020. "Post Covid-19: recovering and sustaining India’s growth," Indian Economic Review, Springer, vol. 55(1), pages 161-181, November.
    4. Vikas Charmal & Ashima Goyal, 2021. "Liquidity management and monetary transmission: empirical analysis for India," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 49(5), pages 850-875, July.
    5. Shelja Bhatia, 2023. "Bank capital channel of monetary policy: panel data evidence for India," Indian Economic Review, Springer, vol. 58(2), pages 423-443, September.

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    More about this item

    Keywords

    Money markets; transmission; Repo Rate; liquidity;
    All these keywords.

    JEL classification:

    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System

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