How Do the Financial Markets Respond to India’s Asset Purchase Program? Evidence from the COVID-19 Crisis

ABSTRACT

This study examines the impacts of India’s unconventional monetary policy on the exchange rate, stock market, and bond market during the COVID-19 crisis. The Reserve Bank of India announced an asset purchase programs (APPs) four times during the pandemic. Using daily data from January 1, 2019, to August 13, 2021, and applying the EGARCH methodology, this study finds that the APPs effectively reduced the yield rate in the bond market and its volatility. However, the first two announcements did not impact the financial market significantly. In contrast, the third and fourth announcements helped to compress the yield rate and its volatility. Further, the AAPs also helped to restrain the exchange rate depreciation and its volatility. Overall findings suggest that APPs had a desired impact on the targeted variables.

KEYWORDS:

• Unconventional monetary policy
• bond market
• exchange rate
• stock market
• EGARCH

JEL CLASSIFICATION:

• E44
• E52
• E58
• E65

Disclosure Statement

No potential conflict of interest was reported by the author(s).

Notes

1. For information see Kumar, Prabheesh, and Bashar (2022).

2. During the COVID-19 crisis, due to relatively tight fiscal constraints, the RBI had to step up to mitigate the adverse impact of the COVID-19 crisis. The main objective of the RBI was to mitigate the negative impact of COVID-19, enhance the transmission of monetary policy, preserve financial stability, prevent the financial market from freezing up (RBI 2020), also to ensure the orderly evolution of the yield curve (Mohan, 2021). To mitigate the adverse impact of COVID-19, RBI conducted a plethora of policy changes starting from March 2020, such as an expansion of the monetary policy corridor, forward guidance, liquidity management and special credit facility, ways and means advances, asset purchase programs, operation twists. Given the extensive measures taken by the RBI, it makes an important case to analyze the policy action on target variables, particularly the asset purchase program, for policy implications.

3. For more information regarding the various conventional and unconventional monetary policy measures taken by the Reserve Bank of India, refer to the RBI working paper by Talwar, Kushawaha, and Bhattacharyya (2021).

4. For more information about the RBI’s asset purchase programs, see Appendix Table 1.

5. See further the BIS working paper by Cantú et al. (2021) for other unconventional policy measures.

6. At the time of the data collection, the latest data points available are selected. Further, sufficient data points are needed to obtain meaningful findings; therefore, we choose the starting date of sample period.

7. For more information about data source, measurement see Appendix A Table 2.

8. The estimation is carried out in Eviews by using the Marquardt and Eviews legacy, and the EGARCH model AR (2) EGARCH (2, 2) is found to have better results and robustness than other available algorithms.

9. The EGARCH (2, 2) model is chosen based on the AIC criteria, and the results are found to be better.

10. Narayan (2020) in find the due to bubble activity intensification exchange market became inefficient in the COVID-19 period.

11. The authors document that the Reserve Bank of India’s foreign reserves declined from USD485.818 billion to USD477.450 billion during the foreign exchange intervention from February 28, 2020 to May 1, 2020.

12. For the asset purchase amount information see the paper by Cantú et al., 2021.