Global Spillovers and Monetary Policy Transmission in India

Do global spillovers clog transmission channels of monetary policy through domestic financial markets? Drawing on stylised facts and using a dynamic factor model to develop an indicator of global spillovers (IGS), a time-varying parameter vector autoregression (TVP-VAR) model results indicate that monetary policy transmission through the money market is complete even in the face of global spillovers. In the debt market, global spillovers affect transmission and can even produce overshooting and over-corrections, but domestic factors such as market microstructure have a stronger influence. In the credit market, spillovers have no statistically significant influence on transmission to lending rates. Asset quality of banks and financial deepening play a more important role.