Interest Rate Pass-Through From The Weighted Average Call Rate To The Primary Commercial Paper Market In India Using Daily Data: An Empirical Analysis
Speaker(s) Mr. Arun Vishnu Kumar, Assistant Adviser, FMOD Publication Reserve Bank of India, CAFRAL, Mezzanine floor, Main Building, Shahid Bhagat Singh road, Fort, Mumbai 400001

The paper aims to model the interest rate pass-through from the weighted average call rate (WACR) to the discount rate in the primary Commercial Paper market (CPDR) in India using daily data from March 12, 2010 to February 23, 2017. Both the daily CPDR and WACR series turned stationary at first differences and were cointegrated. Accordingly, an error correction model is estimated with both the long-run and the short-run equations adjusted for ARCH effects/volatility clustering. The long-run elasticity of CPDR with respect to the WACR was 0.584, that is, about 58 per cent of the change in the WACR gets passed on the CPDR. In the short run, while amount asymmetry, timing/pattern asymmetry and adjustment asymmetry were absent, there was evidence of shock asymmetry. The evidence of shock asymmetry may be due to the existence of ‘search cost’. This explanation would, however, require further investigation.

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