SDG 8: Decent Work and Economic Growth | SDG 17: Partnerships for the Goals
Reserve Bank of India (RBI) | Ministry of Finance
The International Monetary Fund (IMF) working paper titled Still Packing a Punch: Monetary Policy Transmission in a New Cross-Country High-Frequency Dataset introduces a state-of-the-art cross-country dataset to more accurately identify exogenous monetary policy shocks. Traditional daily data often fail to isolate policy signals from other macroeconomic news. By utilizing High-Frequency Identification (HFI)—analyzing asset price movements in a narrow 30-minute window around central bank announcements—the study isolates “target surprises” (unexpected current rate changes) and “path surprises” (revisions to future rate expectations) for 16 major economies, including India.
Robust Transmission Across Assets The findings confirm that monetary policy remains a potent tool for influencing financial conditions.
Yield Curve Impact: A 100-basis-point target surprise leads to a median increase of 43 basis points in medium-term yields and 20 basis points in long-term yields.
Equity and Exchange Rates: Such shocks typically cause a 1.83% decline in stock prices and a 2.45% appreciation of the domestic currency.
Information Effects: The study finds limited evidence that market reactions are driven by “central bank information effects” (news about the economic outlook), confirming that high-frequency windows capture pure policy signals.
Global Synchronization and COVID-19 Post-pandemic analysis reveals that while transmission to bond yields and equity remains stable, exchange rate responses have weakened significantly in advanced economies since May 2021. This is attributed to the high degree of global monetary policy synchronization during the recent tightening cycle, which compressed interest rate differentials and muted relative currency movements.
What is “High-Frequency Identification” (HFI) in the context of this IMF paper? HFI is a statistical technique that isolates the unexpected component of a monetary policy announcement by measuring financial market changes (like interest rate swaps or bond yields) in an extremely narrow time window—typically 10 minutes before and 20 minutes after the announcement. Because this window is so short, the observed changes are assumed to be a direct reaction to the central bank’s signal rather than being “contaminated” by other daily news events, providing a “pure” measure of a monetary policy shock.
Policy Relevance
The IMF findings provide critical technical and strategic validation for the Reserve Bank of India (RBI) and the Ministry of Finance.
Quantifying Transmission Efficacy: The report highlights that India’s transition to an inflation-targeting framework in 2016 has enabled more precise shock identification. For India, the data shows that target surprises have a robust impact on stock prices, whereas path surprises (forward guidance) significantly influence longer-term yields.
Communication Strategy: Given the “fatter tails” observed in EM surprises, which reflect greater volatility and predictability challenges compared to advanced economies, the RBI may benefit from refining its forward guidance to enhance market predictability and reduce volatility.
Stability of Local Channels: The finding that core domestic transmission to yields and equity remains unchanged post-COVID-19 suggests that the RBI’s domestic policy levers are still effective, even if global synchronization has temporarily muted the exchange rate channel.
Informing Fiscal Strategy: For the Ministry of Finance, the persistent impact of “path shocks” on long-term yields underscores that central bank communication regarding the future rate trajectory remains influential for shaping market expectations and potentially affecting private capital expenditure decisions.
Follow the full paper here: Still Packing a Punch: Monetary Policy Transmission in a New Cross-Country High-Frequency Dataset