How effective are monetary policy signals in India?

Abstract

The signalling mechanism of monetary policy is of vital importance as it conveys the central bank's assessment of the economy and its future outlook. In the Indian context, changes in the policy environment since the later half of the 1990s have brought about shifts in the operating procedure of monetary policy. As a result, beside the traditional instruments, new indirect instruments have emerged as tools of monetary policy signalling. Against this backdrop, we examine the efficacy and robustness of alternative monetary policy instruments in transmitting policy signals and its impact on financial market behaviour. Employing a SVAR model, we ascertain whether the gradual emphasis on indirect instruments have facilitated the task of conveying the monetary policy stance and also provide evidence of asymmetric response of financial markets to monetary policy shocks.