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Impact of global liquidity on Indian financial markets and monetary policy outcomes: An ARDL approach

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  • Padha, Vimarsh
  • Chaubal, Aditi

Abstract

Liquidity management is essential for the financial framework of any economy, especially for operationalizing monetary policy. The relatively resilient Indian financial system experiences the transmission of global liquidity shocks, which results in a reversal of portfolio flows from domestic markets resulting in central bank interventions. This paper examines the impact of global liquidity shocks on key financial and monetary variables of the Indian economy using quarterly data for the period 2000–2018 using an autoregressive distributed lags framework. We find the presence of long-run relationships between global liquidity variables (such as the US treasury bill rate, CBOE-VIX index, and US broad monetary aggregate) and the Indian financial markets (NSE Nifty index) and the monetary policy outcome (91-day Treasury bill rate). In the short run, the results were significant for the impact of the risk aversion measure on domestic policy rate in line with the expectations channel. The exchange rate channel and global money supply also significantly impacted the Indian policy rate. The results have significant policy implications as they indicate the most optimal transmission channels through which global liquidity affects the Indian economy.

Suggested Citation

  • Padha, Vimarsh & Chaubal, Aditi, 2024. "Impact of global liquidity on Indian financial markets and monetary policy outcomes: An ARDL approach," Journal of Asian Economics, Elsevier, vol. 90(C).
    • Handle: RePEc:eee:asieco:v:90:y:2024:i:c:s1049007823000945
    DOI: 10.1016/j.asieco.2023.101674
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    Keywords

    Global liquidity; Monetary policy; Financial markets; India; ARDL;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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