Impact of RBI’s monetary policy announcements on government bond yields: evidence from the pandemic

Abstract

We investigate how the bond market responded to the Reserve Bank of India’s (RBI) monetary policy actions undertaken since the start of the pandemic. Our approach involves combining a narrative analysis of the media coverage together with an event-study framework around RBI’s monetary policy announcements. We find that the RBI’s actions early in the pandemic were helpful in providing an expansionary impulse to the bond market. Specifically, long-term bond interest rates would have been meaningfully higher in the early months of the pandemic if not for the actions undertaken by the RBI. These actions involved unconventional policies providing liquidity support and asset purchases. We find that some of the unconventional monetary policy actions had a substantial signaling channel component where the market perceived the announcement of an unconventional monetary policy action as representing a lower future path for the short-term policy rate. We also find that the RBI’s forward guidance was more effective in the pandemic than it had been in the couple of years preceding the pandemic.

Introduction to the special issue "Macroeconomic Policy in Turbulent Times in EMEs"

“…The objective was to inject liquidity into the system and ensure the smooth flow of credit from financial intermediaries to the real economy. The first paper in this issue by Lakdawala et al (2023) focuses on analyzing the impact of these monetary policy actions on the government bond market, which is a crucial element in the overall transmission mechanism of monetary policy. India offers an interesting case study for several reasons.…”

“…An additional goal seemed to be to manage the government's borrowing costs, as the pandemic led to unprecedented levels of borrowing by the Indian government from the bond market. Lakdawala et al (2023) make three main contributions to understanding the bond market response to RBI's pandemic-era monetary policy announcements. Firstly, their work examines the media reactions to major policy announcements, providing additional context to understand their impact.…”