RBI’S POST-COVID MONETARY AND LIQUIDITY MEASURES: IMPACT ON MONEY, BOND AND CREDIT MARKETS

Paper Number :WP 19/2022
Publication Date :June 7, 2022

This paper focuses on RBI’s post-covid monetary policy and liquidity measures and its effects on money, bond, deposit and credit markets in terms of interest rate transmission. The first objective of this study is to discuss and assess the various conventional and unconventional policy measures introduced by RBI since February 2019 till end March 2022. The second objective is to examine the effect of RBI’s policy measures on interest rate transmission in the money, bond and the deposit and credit markets. The extraordinary monetary policy responses of the RBI during Covid times were intended to restore and maintain macroeconomic and financial stability. The study found fast and full monetary policy transmission from policy rates to the interest rate in different segments of these markets. There was a visible drop in the liquidity premium in both the government securities and the corporate debt market. Following the RBI’s policy rate cuts and injection of large amount of potential liquidity of $17.2 trillion between February 2020 and end September 2021, financial conditions eased considerably, markets started unfreezing and normalcy returned to various segments of financial market. Credit spreads or risk premium narrowed appreciably in corporate bond market across maturities, issuers and ratings. Short-term Money market rates went lower and even dropped below the reverse repo rate during the most of the post pandemic period, which paved for steep fall in interest rates in deposit and credit market. Hence, RBI’s post covid monetary policy measures were very successful in creating initial conditions for durable credit offtake.