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Measuring monetary policy shocks in India

Aeimit Lakdawala and Rajeswari Sengupta ()

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

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.

Keywords: monetary policy; Reserve Bank of India; event study; monetary transmission (search for similar items in EconPapers)
JEL-codes: E44 E52 E58 G10 (search for similar items in EconPapers)
Pages: 50 pages
Date: 2021-08
New Economics Papers: this item is included in nep-ban, nep-cba, nep-ifn, nep-isf, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:ind:igiwpp:2021-021

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