Interest Rate Determination in India: Analyzing RBI’s Post-Covid Monetary Policy Stance Using High Frequency Data

C, Prasanth and Chakraborty, Lekha and K Shihab, Nehla (2024): Interest Rate Determination in India: Analyzing RBI’s Post-Covid Monetary Policy Stance Using High Frequency Data.

Abstract

Against the backdrop of the new Monetary Policy Committee (MPC) decisions to maintain the status quo policy rates, we analyse the post-pandemic monetary policy stance in India. Using high-frequency data, the term structure of interest rate is analyzed incorporating monetary aggregates, fiscal deficit, inflation expectations and capital flows. The results revealed that the fiscal deficit does not significantly determine interest rates in the post-pandemic monetary policy stance in India. The long-term interest rates were strongly influenced by the short-term interest rates, which reinforces that term structure is operating in India. The results further revealed that long-term interest rates were also positively influenced by capital flows, and inflation expectations, while it was inversely impacted by the money supply. These inferences have policy implications on the fiscal and monetary policy coordination in India, where it is crucial to analyse the efficacy of high interest rate regime on public debt management. Our results also refute the popular belief that deficits determine interest rates in the context of emerging economies.

• Item Type: MPRA Paper
• Language: English
• Keywords: Interest Rate Determination, Post Pandemic Monetary Policy, Fiscal Deficit, Monetary Policy Commitee
• Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E43 - Interest Rates: Determination, Term Structure, and Effects; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E63 - Comparative or Joint Analysis of Fiscal and Monetary Policy ; Stabilization ; Treasury Policy

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