Interest rates: Experience of financial markets in the last decade

Abstract

An understanding of the dynamic relationship between the monetary policy tool, the overnight cash rate, and the ultimate goals of the policy, inflation and output, is necessary for good policymaking. However, due to the numerous transmission channels via which monetary policy affects the economy, a detailed understanding of this link between instruments and objectives is a challenging endeavour. Also, the effect of the monetary policy is expected to take place after a lag. This paper aims to understand and estimate the lag between the repo rate and inflation (CPI) and the stock market via its index (BSE SENSEX).