Revisiting the Response of the Term Structure of Interest Rates to Policy Rate Changes: Evidence from India

Abstract

This paper analyses the response of the term structure of market interest rates to changes in repo or reverse repo rate as announced by RBI to control liquidity in the system. I use the heteroskedastic consistent covariance matrix estimators, HC3 variant, for estimating different uni-variate regression models. For India, I conclude that announcement effects for short term interest rates are stronger, whereas longer term interest rates have responded weakly to the announcements of policy rate changes, though there do exist significant anticipatory-effects in case of longer maturity government securities.