An Assessment of Unconventional Monetary Policy During COVID-19 Pandemic in India

Abstract

We employ event study methodology to analyze the impact of unprecedented unconventional monetary policy (UMP) measures employed by the Reserve Bank of India to fortify monetary transmission mechanism and to restore financial stability. We find that the UMP announcements result in a decline in bond yields and yield spread as well as increase in market capitalization and sectoral portfolio of stock returns. Evaluating the relative efficacy of UMP measures, we find that targeted long-term repo operation announcements are more effective in easing bond yields than mere long-term repo operations. Our findings provide beneficial inference for day-traders and investors as asset prices increase significantly and durable goods producing stock returns found to be higher than those of non-durable goods. The lessons that can be drawn for the emerging market economy central banks, who do not have enough space to conduct conventional monetary policy and even when they do not face zero lower bound interest rate, they still can employ UMP tools to directly influence banks cost of funds, and long-term bond yields and interest rates, and in turn, portfolio of stock returns and investments to stimulate aggregate demand. JEL Codes: C13, C54, E52, E65