Monetary Transmission in India: Working of Price and Quantum Channels

The paper examines the strength and efficacy of transmission from the policy rate and liquidity provision to market rates in India, using event window regression analysis. The paper finds the interest rate transmission channel is dominant, but the quantity channel has an indirect impact in increasing the size of interest rate pass through. The speed of response is faster where there is more market depth. Short term liquidity matters for short term rates, especially where markets are thin and long-term liquidity for longer term government securities. Asymmetry, or more transmission during tightening, finds little support, but pass through is faster during tightening. Market rates respond similarly to policy rate changing direction. The quantum channel directly contributes more when in sync with the interest rate channel only occasionally, but contributes indirectly by increasing the size of coefficients. Implications for policy are drawn out.