Monetary policy transmission in primary and secondary markets: Evidence from Indian government securities

Central banks aim to achieve price stability by adjusting interest rates to meet their inflation target. However, when a central bank also manages the government debt, tightening policy rates raises borrowing costs, thereby increasing the probability of debt distress. To understand the nature of this trade-off, we examine how policy rate changes by the Reserve Bank of India affect the Government of India's actual borrowing costs. Using monthly data from 2004 to 2025 and an ARDL error-correction framework, we estimate the differential impact of policy rate on both primary and secondary markets and find a clear divergence. In secondary markets, pass-through is gradual and declines with maturity, whereas in the primary markets, transmission is immediate and near-complete, and it remains durably anchored to the policy rate in the long run. We interpret this as a distinctive feature of India's institutional arrangement, where captive investors and the RBI's discretionary authority over auctions keep sovereign borrowing costs closely tied to monetary policy.