Impact of RBI’s monetary policy announcements on government bond yields: evidence from the pandemic

Aeimit Lakdawala, Bhanu Pratap () and Rajeswari Sengupta
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Bhanu Pratap: Reserve Bank of India

Indian Economic Review, 2023, vol. 58, issue 2, No 2, 291 pages

Abstract: Abstract We investigate how the bond market responded to the Reserve Bank of India’s (RBI) monetary policy actions undertaken since the start of the pandemic. Our approach involves combining a narrative analysis of the media coverage together with an event-study framework around RBI’s monetary policy announcements. We find that the RBI’s actions early in the pandemic were helpful in providing an expansionary impulse to the bond market. Specifically, long-term bond interest rates would have been meaningfully higher in the early months of the pandemic if not for the actions undertaken by the RBI. These actions involved unconventional policies providing liquidity support and asset purchases. We find that some of the unconventional monetary policy actions had a substantial signaling channel component where the market perceived the announcement of an unconventional monetary policy action as representing a lower future path for the short-term policy rate. We also find that the RBI’s forward guidance was more effective in the pandemic than it had been in the couple of years preceding the pandemic.

Keywords: Monetary Policy; Reserve Bank of India; Unconventional Monetary Policy; Bond Yields; Forward Guidance; Pandemic (search for similar items in EconPapers)
JEL-codes: E44 E52 E58 G10 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1007/s41775-023-00171-2

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