Abstract
This paper looks into the role of interest rate in the monetary transmission mechanism in India. It analyses the effect of the changes in the policy rate on the different segments of the financial market in India from the onset of Liquidity Adjustment Facility (LAF), i.e, July 2000 onwards to March 2014. A VAR model comprising of interest rate, output, price and exchange rate is estimated for the same period, to study the effect of changes in the policy rate on the various macroeconomic variables. The policy rate is proxied as the monthly weighted average overnight call money rate i.e., CMR as this is the operating target of the RBI. Both the exercises show that interest rate channel has gained in importance for the Indian economy after the deregulation of interest rates and adoption of the new monetary operating framework.
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