RBI policy transmitted better via short-term rates: Study

MUMBAI: Monetary policy transmission is higher through short-term rates than long term rates, a study by Reserve Bank of India staff found.

A 100 basis points increase in the policy rate could, over time, lead to an increase of around 95 bps in 15-91 days Treasury Bill yields and around 20 bps for 10-year government bonds, estimates the study. The study found that between December 2014 and August 2017, the RBI cut its policy rate by 200 basis points (bps, one bps is 0.01 per cent) and the yield on 10-year government securities (G-Secs) fell by 140 bps.

However, between August 2017 and May 2018, the yield on 10-year G-Secs increased by 140 bps though the Reserve Bank’s policy repo rate was unchanged at 6 per cent in this period.However, yields on short-term treasury bills (TBs) over both these periods moved broadly in tandem with the policy repo rate. This trend is similar to that observed in advanced economies such as the US, the study said.

The study notes that the significance of the link between the policy rate and the G-Sec yields lies in the fact that government securities market, given its risk-free nature, is a key conduit for transmission of monetary policy impulses to the broader real economy by the virtue of it being a benchmark for pricing of other financial instruments.