The monetary policy transmission from official rate to unofficial rate under liquidity adjustment facility in India

This paper empirically examines the dynamic relationship between two short-term interest rates namely, repo rate (official) and call money rate (unofficial) during the full-fledged working of the liquidity adjustment facility in India. Using daily data, the study finds a strong relationship between the two rates in the long run and short-run, through cointegration tests and Error Correction Mechanism (ECM) respectively. The ECM and Granger causality test results reveal the bi-directional causality between the two rates in the short run and unidirectional causality from official to unofficial rate in the long run. The paper also examines the transmission of monetary policy impulses from official rates to unofficial rates and vice-versa. The Impulse Response Functions result shows that, in the short run, the interest rates responds to shocks to itself and other variables in the system, suggesting that monetary policy impulse can be efficiently transmitted to other financial markets.