Open Access Subscription Access
Open Access Subscription Access
Transmission Mechanism of Monetary Policy:Case Study of Interest Rate Channel in India
In India, prior to 1991, the tightly controlled interest rates caused impediments in the functioning of the interest rate channel of monetary policy transmission while after 1991, the RBI undertook various measures to strengthen the market-determination of interest rates. This paper has examined the evolution of the interest channel in India across the period 1985 to 2014 firstly by studying the interest rate pass-through using the Correlation matrix and the OLS technique and secondly, by studying the transmission of policy rates to the real economy using the reduced VAR model. The results show that the transmission of interest rates pass-through from policy rates to market interest rates (both - short-term as well as long-term) has strengthened while desired impact of long term market interest rates on industrial production and inflation appears to be weak.
Correlation, Interest Rate Channel, Monetary Policy, OLS, Transmission Mechanism, Vector Auto Regression.
- Angeloni, I., Kashyap, A. K., Mojon, B. & Terlizzese, D. (2003). Monetary transmission in the Euro area: Does the interest rate channel explain all? NBER Working Paper Series, Working Paper No. 9984
- Angeloni, I., Kashyap, A. K., Mojon, B. & Terlizzese, D. (2002). Monetary transmission in the Euro area: Where do we stand? ECB Working Paper Series 114.
- Azali, M. & Matthews, K. G. P. (1999). Money-income and credit-income relationships during the pre- and the post-liberalisation periods: Evidence from Malaysia. Applied Economics. 31(10), 1161-1170.
- Balke, N. & Emery, K. (1994). Understanding the price puzzle. Federal Reserve Bank of Dallas, Economic Review, Fourth Quarter.
- Bhattacharya, R., Patnaik, I. & Shah, A. (2011). Monetary policy transmission in an emerging market setting. IMF Working Paper WP/11/5.
- Boivin, J., Kiley, M. T. & Mishkin, F. S. (2010). How has the monetary transmission mechanism evolved over time? NBER Working Paper 15879.
- Bondt, G. de. (2002). Retail bank interest rate pass-through: New evidence at the Euro Area level. European Central Bank Working Paper No.136.
- Cook, T. & Hahn, T. (1989). The effect of changes in the federal funds rate target on market interest rates in the 1970s. Journal of Monetary Economics, 24(3), 331-51.
- Cukierman, Alex (2004). Review of monetary policy: Rules and transmission mechanism. N. Loayza and K. Schmidt-Hebbel (eds.), Tel-Aviv University.
- Dhal, S. (2000). Short term interest rate and real economic activity. Reserve Bank of India Occasional Papers, 21(1), Summer.
- Dhal, S. & Bhoi, B. K. (1998). Integration of financial markets in India: An empirical evaluation. Reserve Bank of India Occasional Papers 04/1998, 19(4).
- Dueker, M. j. (2006). The price puzzle: An update and a lesson. Economic Synposes, 24.
- Endut, N., Morley, J. & Tien, P. (2013). The changing transmission mechanism of U.S. monetary policy. Retrieved from research.economics.unsw.edu.au/jmorley/emt.pdf
- Hildebrand, P. (2006). Monetary policy and financial markets. Swiss National Bank, Financial Markets and Portfolio Management, 20(1), 7-18.
- Ireland, P. (2006). Monetary policy transmission mechanism, Reserve Bank of Boston. Working paper No. 06-1
- Jain, S. & Bhanumurthy, N.R. (2005). Financial markets integration in India. AsiaPacific Development Journal, 12(2), 15-32.
- Kumar, N. (2014). Politics and real firm activity: Evidence from distortions in bank lending in India. Mimeo, University of Chicago.
- Kuttner, K. & Patricia, M. (2002). The monetary transmission mechanism: Some answers and further questions, FRBNY Economic Policy Review, May, 15-26.
- Mishkin, F. (1995). Symposium on the monetary transmission mechanism. Journal of Economic Perspectives, 9(4), 3–10.
- Mohan, R. (2006). Transmission mechanisms for monetary policy in emerging market economies - What is new? Paper presented at Bank for International Settlements, Basel on December 7-8, 2006. Retrieved from http://www.rakeshmohan.com/docs/RBIBulletinApril2007.pdf
- Mohan, R. (2007). Monetary policy transmission in India. RBI Monthly Bulletin. April 2007, pp. 421 – 472.
- Mohanty, D. (2010). Monetary policy framework in India: Experience with multipleindicators approach. Speech delivered at the Conference of the Orissa Economic Association in Baripada, Orissa, 21st February, 2010. Retrieved from https://www.bis.org/review/r100304e.pdf
- Mohanty, D. (2010a). Implementation of monetary policy in India. esocialsciences.com, Working Papers Retrieved from https://www.researchgate.net/publication/46476446_Implementation_of_Monetary_Policy_in_India
- Mohanty, D. (2011). How does the Reserve Bank of India conduct its monetary policy? Speech delivered at the Indian Institute of Management (IIM), Lucknow on 12th August, 2011. Retrieved from https://www.bis.org/review/r110816a.pdf
- Mohanty, Deepak (2012). Money market and monetary operations in India. Speech delivered at the Seminar on ‘Issues in Financial Markets’, Mumbai, 15th December, 2012. Retrieved from https://www.bis.org/review/r121218d.pdf
- Mohanty, D. (2012a). Evidence on interest rate channel of monetary policy transmission in India. RBI Occasional Working Paper. Retrieved from https://www.rbi.org.in/scripts/PublicationsView.aspx?id=14235
- Mohanty, D. (2013). Indian Inflation Puzzle, Speech in the function of Late Dr. Ramchandra Parnerkar Outstanding Economics Award 2013 at Mumbai. Retrieved from https://www.bis.org/review/r130205c.pdf
- Mohanty, D. & Mitra, A. K. (1999). Experience with monetary targeting in India. Economic and Political Weekly, XXXIV(3 and 4), 123-132.
- Mojon, B. (2000). Financial structure and the interest rate channel of ECB monetary policy. ECB Working Paper No 40.
- Mojon B. & Peersman, G. (2001). A VAR description of the effects of the monetary policy in the countries of the Euro Area. ECB Working Paper 92.
- Moreno, R. (2008). Monetary transmission mechanism and long term interest rate in emerging markets. BIS Papers. In Bank for International Settlements (ed.), Transmission Mechanisms for Monetary Policy in Emerging Market Economies, 35, 1–59.
- Nag, A. & Mitra, A. (1999). Integration of financial markets in India: An empirical investigation. Journal of Social and Management Sciences, PRAJNAN, 28(3), 219-242.
- Pacheco, M. & Shiraly, P. (2014). Dynamics of monetary policy framework in India. CCIL Monthly Newsletter, pp. 7-22.
- Pathak, B. (2008). Indian financial system: Markets, institutions and services. Pearson Education, 2nd ed., New Delhi.
- Patnaik, A. & Ramanathan, A. (2007). The interest rate channel of monetary transmission mechanism in India: An empirical study. Artha Vijnana, XLIX(2), 141-156.
- Prasad, A. & Ghosh, S. (2005). Monetary policy and corporate behavior in India. International Monetary Fund Working Paper No WP/05/25.
- Ramey, V. (1993). How important is the credit channel in the transmission of monetary policy? Carnegie-Rochester Conference Series on Public Policy 39, pp. l-45.
- Ray, P. & Prabhu, E. (2013). Financial development and monetary policy transmission across financial markets: What do daily data tell for India? RBI Working Paper Series No. 4. Retrieved from https://www.rbi.org.in/scripts/PublicationsView.aspx?id=14985
- Ray, P., Joshi, H. & Saggar, M. (1998). New monetary transmission channels role of interest rates and exchange rate in conduct of Indian monetary policy. Economic and Political Weekly, 33(44), 2787-2794.
- Samantaraya, A. (2011). Transmission mechanism and operating procedure of monetary policy in India: An econometric analysis. Retrieved from http://hdl.handle.net/10603/1897
- Sastry, D. V. S., Singh, B. & Bhattacharya, K. (2001). Monetary policy transmission from official interest rates to lending rates in India. Mimeo, Reserve Bank of India.
- Sellon, G. H. (2002). The changing U.S. financial system: Some implications for the monetary transmission mechanism. Federal Reserve Bank of Kansas City, Economic Review, 1st Quarter, 5–35.
- Sims, C. (1980). Macroeconomics and Reality. Econometrica. 48 (1), 1-48.
- Smets, F. & Wouters, R. (2003). An estimated dynamic stochastic general equilibrium model of the Euro area. Journal of the European Economic Association, 1(5), 1123-1175.
- Srimany, A & Samanta, G. (1998). Identification of monetary policy shock and its effects on output and price: A structural VAR approach. Reserve Bank of India Occasional Papers, June.
- Stock, J. H. & Watson, M. W. (2001). Vector autoregressions. Journal of Economic Perspectives, 15(4), 101-115.
- Taylor, J. (1995). The monetary transmission mechanism: An empirical framework. Journal of Economic Perspectives, 9(4), 11-26.
- The Reserve Bank of India. (2004). Determinants of Interest Rate Pass-through, VII. Monetary Transmission Mechanism (Part 1 of 2).
- The Reserve Bank of India. (2007). VIII - Financial Markets Integration. Report on Currency and Finance, RBI.
- The Reserve Bank of India. (2011). Report of the Working Group on Operating Procedure of Monetary Policy (Chairman: Deepak Mohanty).
- Thornton, D. (2005). Tests of the expectations hypothesis: Resolving the anomalies when the short-term rate is the federal funds rate. Journal of Banking and Finance, 29, 2541-2556.
- Van, P. J. A., Locarno, A. Morgan, J. & Villetelle, J-P. (2001). Monetary policy transmission in the Euro area: what do aggregate and national structural models tell us? ECB Working Paper No. 94.
- Wulandari, R. (2012). Do credit channel and interest rate channel play important role in monetary transmission mechanism in Indonesia: A structural vector autoregression. Model. International Congress on Interdisciplinary Business and Social Sciences, 65, 557–563.
- Yue, Y. & Zhou, S. (2007). Empirical analysis of the monetary policy transmission through interest rate channel in China. Chinese Business Review, 6(3), 8-13.
Abstract Views: 256
PDF Views: 158