Policy transmission in Indian money markets: The role of liquidity

Ashima Goyal and Deepak Kumar Agarwal

Indira Gandhi Institute of Development Research, Mumbai Working Papers from Indira Gandhi Institute of Development Research, Mumbai, India

Abstract: We derive testable implications for transmission from Indian policy rate and liquidity provision to market rates as well as the interaction between rate and liquidity channels, from an analysis of operating procedures and estimate using event window regressions. The interest rate transmission channel is dominant, but the quantity channel has an indirect impact on the size of interest rate pass through. Short run government securities (G-Secs) yields are most responsive to changes in policy rates. Asymmetry or faster and more adjustment during tightening is found only for G-Secs rates. Liquidity changes matter for short term rates and durable liquidity for longer term government securities. Collateralized short-term market rates respond to the direction of change in Repo when liquidity changes are aligned. These or short-run G-Secs should form the operating target. Liquidity variables increase the size of the G-Secs Repo coefficients, suggesting aligned liquidity increases the impact of a change in the Repo Rate. The results highlight an important asymmetry in monetary transmission for emerging markets in the special role of liquidity in comparison to rates. Implications follow for policy.

Keywords: Money markets; transmission; Repo Rate; liquidity (search for similar items in EconPapers)
JEL-codes: E42 E51 E58 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2019-08
New Economics Papers: this item is included in nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Journal Article: Policy transmission in Indian money markets: The role of liquidity (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:ind:igiwpp:2019-027

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