Copyright Page
© 2022 International Monetary Fund
WP/22/209
IMF Working Paper
Asia and Pacific Department
Monetary Policy Communication and Financial Markets in India Prepared by Faisal Ahmed, Mahir Binici, and Jarkko Turunen
Authorized for distribution by Nada Choueiri
October 2022
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
ABSTRACT: Forward-looking monetary policy communication has become a key element of flexible inflation-targeting regimes across advanced and emerging market economies. The Reserve Bank of India’s implementation of a flexible inflation targeting framework since 2016 has been supported by a broad set of communication tools, more recently aided by policy innovations such as forward guidance on policy rates and, asset purchases, increasing the predictability of monetary policy. A review of the recent innovations of monetary policy communications during the initial waves of the pandemic suggests forward guidance likely played a key role in moderating uncertainty and supporting some asset prices. We also find that the relationship between monetary policy surprises and yields for government and corporate securities across all maturities are positive and statistically significant. The results support an important role for monetary policy communication in guiding market expectations about the monetary policy stance, including the likely path of policy interest rates.
| JEL Classification Numbers: | E43, E44, E52, E58, G12 |
| Keywords: | Monetary policy; communication; forward guidance; inflation targeting; India |
| Author’s E-Mail Address: | FAhmed@imf.org, MBinici2@imf.org, JTurunen@imf.org |
| JEL Classification Numbers: | E43, E44, E52, E58, G12 |
| Keywords: | Monetary policy; communication; forward guidance; inflation targeting; India |
| Author’s E-Mail Address: | FAhmed@imf.org, MBinici2@imf.org, JTurunen@imf.org |
Title Page
WORKING PAPERS
Monetary Policy Communication and Financial Markets in India
Prepared by Faisal Ahmed, Mahir Binici, and Jarkko Turunen1
Contents
I. Introduction
II. Literature
III. Monetary Policy Communication Framework in India
IV. A Narrative Analysis of Communication and Asset Prices
V. The Impact of Monetary Policy Announcements on Asset Prices
V.I Methodology
V.II Results
VI. Conclusion
References
We thank Elif Arbatli Saxegaard, Marco Casiraghi, Nada Choueiri, Alfred Schipke, Sergio Sola, TengTeng Xu, and the participants at the RBI seminar for useful comments and suggestions, and Nimarjit Singh and Ankita Goel for excellent help with the data.