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Measuring monetary policy shocks in India

Author

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  • Aeimit Lakdawala

    (Wake Forest University)

  • Rajeswari Sengupta

    (Indira Gandhi Institute of Development Research)

Abstract

We create new measures of monetary policy shocks for India using high-frequency derivatives data and study their transmission. These shocks capture two distinct dimensions of the Reserve Bank of India's (RBI) monetary policy announcements. In addition to reacting to surprise changes (or non-changes) in the RBI's policy rate, financial markets also infer substantial information about the future path of the policy rate from RBI's communication. We analyze official statements and the corresponding media narrative on prominent RBI announcement dates to help understand how markets use RBI communication to update their expectations. Overall, 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.

Suggested Citation

  • Aeimit Lakdawala & Rajeswari Sengupta, 2021. "Measuring monetary policy shocks in India," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2021-021, Indira Gandhi Institute of Development Research, Mumbai, India.
    • Handle: RePEc:ind:igiwpp:2021-021
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    File URL: http://www.igidr.ac.in/pdf/publication/WP-2021-021.pdf
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    References listed on IDEAS

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    Cited by:

    1. Sangyup Choi & Tim Willems & Seung Yong Yoo, 2022. "Revisiting the Monetary Transmission Mechanism Through an Industry-Level Differential Approach," IMF Working Papers 2022/017, International Monetary Fund.
    2. Vaishali Garga & Aeimit Lakdawala & Rajeswari Sengupta, 2022. "Assessing central bank commitment to inflation targeting: Evidence from financial market expectations in India," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2022-017, Indira Gandhi Institute of Development Research, Mumbai, India.
    3. Sardar, Rashedur & Schaffer, Matthew, 2022. "International Monetary Spillovers to Frontier Financial Markets: Evidence from Bangladesh," UNCG Economics Working Papers 22-5, University of North Carolina at Greensboro, Department of Economics.
    4. Aeimit Lakdawala & Bhanu Pratap & Rajeswari Sengupta, 2023. "Impact of RBI’s monetary policy announcements on government bond yields: evidence from the pandemic," Indian Economic Review, Springer, vol. 58(2), pages 261-291, September.
    5. Mr. Faisal Ahmed & Mahir Binici & Mr. Jarkko Turunen, 2022. "Monetary Policy Communication and Financial Markets in India," IMF Working Papers 2022/209, International Monetary Fund.
    6. Fu, Liang & Ho, Chun-Yu, 2022. "Monetary policy surprises and interest rates under China's evolving monetary policy framework," Emerging Markets Review, Elsevier, vol. 52(C).

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    More about this item

    Keywords

    monetary policy; Reserve Bank of India; event study; monetary transmission;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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