Financial Development and Monetary Policy Transmission Across Financial Markets: What Do Daily Data Tell for India?

W P S (DEPR): 04 / 2013

RBI WORKING PAPER SERIES

Financial Development and Monetary Policy Transmission Across Financial Markets: What Do Daily Data tell for India?

Partha Ray and Edwin Prabu

DEPARTMENT OF ECONOMIC AND POLICY RESEARCH

APRIL 2013

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Copyright: Reserve Bank of India 2013

Financial Development and Monetary Policy Transmission Across Financial Markets: What Do Daily Data tell for India?1 Partha Ray 2 and Edwin Prabu 3
This paper seeks to address two questions In Indian context. First, what is the nature of integration among different segments of Indian financial markets? Second, what has been the influence of monetary policy on different segments of financial markets? As far as domestic financial integration is concerned, the study finds that the money market segment is fairly integrated. At the next level, among the constituents of the domestic financial markets, G-sec and corporate bond market are somewhat integrated. There is, however, limited evidence of integration between the money market and stock market. Using daily data over January 2005 – November 2012, the paper constructs a structural Vector autoregression (SVAR) model and studies the financial markets microstructure and monetary policy transmission in India related to four key segments, viz., money, bonds (GSec and corporate debt), forex and stock market. While the transmission of monetary policy to money market is found to be fast and efficient and the effects on bond and forex market are on expected lines, the impact of monetary

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