Log in
Lost password
Become a member for free
Sign up
Sign up
Dynamic quotes 

4-Traders Homepage  >  News


Latest NewsCompaniesMarketsEconomy & ForexCommoditiesHot NewsMost Read NewsRecomm.Business LeadersVideosCalendar 

Reserve Bank of India : RBI Working Paper Series 4 /2013 Monetary Policy Transmission Faster When Monetary System is in Deficit Mode

05/08/2013 | 08:36am US/Eastern

The Reserve Bank of India today placed on its website a Working Paper titled "Financial Development and Monetary Policy Transmission across Financial Markets: What Do Daily Data tell for India?" under the RBI Working Paper Series. The paper has been authored by Dr. Partha Ray and Shri Edwin Prabu.

Developed and integrated financial markets are pre-requisites for effective and credible transmission of monetary policy impulses. The more integrated financial markets are, in all likelihood the more would be the strength of monetary transmission across financial markets. It is in this context that this study looks into the extent of market integration and its implication for monetary policy taking the daily data for the period from January 2005 until November 2012.

In specific terms, the paper analyses two distinct but inter-related issues: (a) the extent of integration among different segments of financial markets; and (b) impact of monetary policy on financial markets. The markets considered are: i) money market (comprising the call money, the collateralised borrowing and lending obligation (CBLO) and the market repo markets); (ii) bond market (comprising Government securities and corporate bonds markets); (iii) forex market (proxied by exchange rate); and (iv) stock market (viz., NSE Nifty).

Using a structural vector autoregression (SVAR) model and imposing identifying restrictions from behavioral patterns of the Indian financial markets, the study finds that the impact of monetary policy on the financial markets differs considerably across four periods classified based on the liquidity position in the system. The transmission of monetary policy works well in the call money rate, as it is impacted immediately with robustness. As regards other financial market variables, except for the stock market, the study could find evidence of transmission from the monetary policy shocks.

Within the sample period of 2005-12, the study finds a distinct pattern of impact of monetary policy on financial markets depending on the stance of the monetary policy (i.e., whether it is expansionary or contractionary). The following results are highlighted in particular:

  • First, the transmission was swift and persistent for the period June 2010 to November 2012, when the liquidity was in deficit mode and the monetary policy was tightened.

  • Second, the transmission was also exhibited in the period January 2005 to November 2006, when the liquidity was in surplus mode but monetary policy was tightened due to inflationary pressures.

  • Third, transmission was not on the expected lines for December 2006 to November 2008 period and December 2008 to May 2010 period, perhaps on account of measures initiated during global financial crisis.

The evidence thus indicates that monetary policy transmission to financial markets in India is asymmetrical - it is faster and persistent when the monetary system is in deficit mode, than when it is in expansionary phase.

The Reserve Bank of India introduced the RBI Working Papers series in March 2011. These papers present research in progress of the staff members of the Reserve Bank and are disseminated to elicit comments and further debate. The views expressed in these papers are those of authors and not those of the Reserve Bank of India. Comments and observations may kindly be forwarded to authors. Citation and use of such papers should take into account its provisional character.

Sangeeta Das

Press Release : 2012-2013/1862

distributed by
React to this article
Latest news
Date Title
11:36a FERRARI NV : Business as usual for mercedes, disaster for ferrari
11:28a FERRARI NV : Formula One - Rosberg hits a six with Abu Dhabi pole
11:27a ARTINI CHINA : 2015-11-27 grant of share options
11:24a AMERICAN EXPRESS : Big season for small business
11:19a KANSAI ELECTRIC POWER : Kepco files bid to extend life of aging Mihama reactor
11:12a PUBLIX SUPER MARKETS : After Thanksgiving, it's the season for Christmas trees in South Florida
11:07a U S MASTERS : Charl Schwartzel takes 3-shot lead into last round of Alfred Dunhill Championship
11:06a VERIZON COMMUNICATIONS : Plantation cell tower denied in first vote
11:06a PUBLIX SUPER MARKETS : Big Red - One Blood
11:02a OCTANEX NL : OPSB awarded EPCIC contract to Muhibbah
Latest news
Hot News 
OPPORTUNITY INVEST MGMT : 27 november 2015 - Announcement AGM on 22 december 2015
ATLANTIS RESOURCES : Tidal generating firm announces long partnership for investment by Gordon Calder
CYTOTOOLS : berichtet über Ergebnisse der europäischen klinischen Studie Phase III: Resultate der Behandlung des diabetischen Fußes mit DermaPro(R) bestätigen nicht die Ergebnisse der vorangegangenen Studien (DGAP News)
STOCK SPIRITS : Further Downgrades Earnings Guidance For 2015
IMAGINATION TECHNOLOGIES : Sir Hossein Yassaie receives 2015 Lifetime Achievement Award in annual Elektra European Electronics Industry Award...
Most Read News
04:51a NIOC NATIONAL IRANIAN OIL : Iran’s Largest Oil Investement Event Opens
11/27 RESEARCH AND MARKETS : Rotavirus Infections Therapeutic Development - Pipeline Review & Analysis, H2 2015
07:37a NIOC NATIONAL IRANIAN OIL : On the sidelines of Tehran Summit: Oil Moguls Eying on Irans 50 Investment Opportunities
03:55a EUROPEAN COMMISSION : Antitrust: new Commission Guidelines on joint selling of olive oil, beef and veal, and arable crops
11/27 RESEARCH AND MARKETS : Acute Renal Failure (ARF) (Acute Kidney Injury) - Pipeline Review & Analysis, H2 2015
Most recommended articles
10:23a DEUTSCHE LUFTHANSA : Lufthansa agrees on pay with ground personnel - Verdi union
10:15a EUR/USD Prepares for its Most Important Week in Months (If Not Years!)
05:45aDJWill Black Friday Deals Give a Boost to Car Sales?
02:48aDJBrazil Plans Suit On Dam Breach, Toxins In River
02:48aDJToshiba Mulls Sale Of Chip-Unit Stake