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Monetary Policy Transmission in India: A Peep Inside the Black Box

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  • Khundrakpam, Jeevan Kumar
  • Jain, Rajeev

Abstract

Using SVAR models on quarterly data for 1996-97:1 to 2011-12:1, the paper examines the relative importance of various transmission channels of monetary policy to GDP growth and inflation in India. It finds that external exogenous factors prolong the impact of monetary policy transmission on GDP growth and inflation in India, while removing the problem of ‘price puzzle’. Among the various channels of transmission, interest rate channel, credit channel and asset prices channel are found to be important, while exchange rate channel is weak. A positive shock to policy rate leads to slowdown in credit growth with a lag of two quarters and subsequently impacts GDP growth and inflation negatively. The same monetary policy shock has a negative impact on asset prices from the third quarter onwards and, in turn, has a pronounced negative impact on GDP growth and inflation. Exchange rate channel is found to have an insignificant impact on GDP growth, but has non-negligible impact on inflation. Interest rate channel is found to account for about half of the total impact of monetary shocks on GDP growth and about one-third of the total impact on inflation, indicating that interest rate channel is the most important channel for monetary policy transmission in India.

Suggested Citation

  • Khundrakpam, Jeevan Kumar & Jain, Rajeev, 2012. "Monetary Policy Transmission in India: A Peep Inside the Black Box," MPRA Paper 50903, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:50903
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    References listed on IDEAS

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    Cited by:

    1. Madhusudan Mohanty & Kumar Rishabh, 2016. "Financial intermediation and monetary policy transmission in EMEs: What has changed post-2008 crisis?," BIS Working Papers 546, Bank for International Settlements.
    2. Khundrakpam, Jeevan Kumar, 2013. "Are there Asymmetric Effects of Monetary Policy in India?," MPRA Paper 53059, University Library of Munich, Germany.
    3. Singh, Sunny Kumar & Rao, D. Tripati, 2014. "Sectoral effects of monetary policy shock: evidence from India," MPRA Paper 62069, University Library of Munich, Germany.
    4. Khundrakpam, Jeevan Kumar, 2013. "A Note on Differential Asymmetric Effects of Money Supply and Policy Rate Shocks in India," MPRA Paper 53058, University Library of Munich, Germany.
    5. S. Gangadaran, "undated". "Inflation in India: Behavior of Major Components," Working Papers wp18, South East Asian Central Banks (SEACEN) Research and Training Centre.
    6. Harendra Behera & Sitikantha Pattanaik & Rajesh Kavediya, 2015. "Natural Interest Rate: Assessing the Stance of India’s Monetary Policy under Uncertainty," Working Papers id:7654, eSocialSciences.
    7. Deba Prasad Rath & Pratik Mitra & Joice John, 2017. "A Measure of Finance-Neutral Output Gap for India," Working Papers id:11986, eSocialSciences.
    8. Ashima Goyal & Deepak Kumar Agarwal, 2017. "Monetary transmission in India: Working of price and quantum channels," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2017-017, Indira Gandhi Institute of Development Research, Mumbai, India.

    More about this item

    Keywords

    Interest Rate Channel; Monetary Policy; Monetary Transmission; Structural VAR;

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • 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

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