Impact of RBI's monetary policy announcements on government bond yields: Evidence from the pandemic

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Impact of RBI's monetary policy announcements on government bond yields: Evidence from the pandemic

28 Mar 2023

While in the developed countries, the governments announced massive fiscal stimulus packages in the wake of the pandemic in order to stimulate demand, in India, much of the heavy lifting was done by the RBI. [...] Given the limited fiscal space (fiscal deficit of the central and state governments in the pre-pandemic period was close to 10 percent of GDP), the fiscal responses of the government were mostly restricted to providing relief measures to the disadvantaged sections of the Indian population. [...] As per the RBI’s liquidity management framework, the repo rate lies in a corridor (referred to as the Liquidity Adjustment Facility or LAF corridor) whose floor is decided by the reverse repo rate and the ceiling is 3 With the shift in focus of the RBI to inflation stabilization in the later part of the pandemic, it is natural to wonder if this changed the monetary transmission mechanism. [...] The rationale and the nature of the policy actions, the transmission channels and the scale of operations are considered the main distinguishing features of UMP announcements (Patra and Bhattacharya, 2022; BIS, 2019). [...] The right panel of the figure shows the cumulative change in the 1-month OIS rate for all RBI announcements in the pandemic in the red line.
Pages
40
Published in
India

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