From monetary policy to financial markets: does the stance matter in India?

Purpose This study aims to examine the transmission of monetary policy to financial markets in India, specifically focussing on whether the impact on financial markets is symmetrical across accommodative and restrictive policy stances during the period 2005–2023. Design/methodology/approach The methodology is based on a structural vector autoregression model that imposes an order of transmission of the monetary policy through various financial markets, using the results of the stance-varying vector autoregressive model and estimating the temporal relationship among the variables representing financial markets. Findings The results indicate that the effect of lags of markets on themselves are affected by the stance in the case of the repo rate, 10Y yield, the USD-INR exchange rate and the NIFTY 50 index, whereas the effect of one market on another is relatively untouched. The effects are substantially more encouraging in the accommodative stance than in the restrictive stance. Research limitations/implications In the formulation of monetary policy, central banks must carefully assess the prevailing economic conditions and choose a stance that aligns with the desired objectives. An understanding of the differential stance specific transmission can inform the calibration of policy instruments to achieve the desired outcomes effectively. Practical implications Acknowledging the variability in the monetary policy transmission (MPT) across different stances is integral to formulating effective and targeted strategies. Policymakers must remain vigilant, continuously assessing the evolving economic landscape and adjusting their approach to best achieve the overarching goals of stability, growth and price control. The adoption of a stance specific and flexible policy framework that accounts for the differential impact of accommodative and restrictive stances is essential for navigating the complexities of modern economic environments. Originality/value To the best of the authors’ knowledge, this study is one of the premier studies that focusses on exploring whether the MPT to the financial market segments varies across the different stance adopted by the central bank of India.