Impact of RBI’s monetary policy on Indian corporates

Abstract

Every economy consists of various sectors, each with their own unique traits. These various sectors react differently to the same unexpected macroeconomic shocks. This study finds that the response of various sectors to a shock in monetary policy is varied, with the IT sector being the most sensitive, using correlation values and graphs of financial indicators and monetary policy. The industries that respond most quickly are those involving information technology, automobiles, and banking. The differences in sectoral effects are influenced by a variety of variables, including capital intensity, interest sensitivity, export focus, and production planning techniques. The most efficient means of transmitting money varies throughout the different sectors. In most sectors, the transmission of monetary policy through the interest rate channel has proven to be the most effective, followed by the credit channel. The need for a more sector-specific monetary policy is therefore indicated by the varied sectoral responses.

Introduction

I. INTRODUCTION

The aggregate economy, in particular the effects of monetary policy decisions on production and price levels, has traditionally been the focus of the majority of studies on the transmission mechanism of the monetary policy. This strategy makes the assumption that the monetary policy has a uniform impact on the entire economy. Every economy, however, consists of various sectors, each with its own unique traits. These industries react differently to the same unexpected macroeconomic stimulus.

Sectoral and regional consequences of recent monetary policy shocks have received a lot of attention. Studies have shown that different economic sectors or geographical areas react differently to changes in monetary policy. The impact of the policy measures in each industry or region will need to be taken into account independently, which has significant consequences for those who make monetary policy.

The monetary authority must understand the scope and duration of the effects of a monetary policy signal on each sector before creating an effective monetary policy for the economy. The variations in sectoral responses to monetary policy are important for three reasons.

First, since different sectors have varied interest rate sensitivities, a monetary policy intended to stabilize aggregate output may fall short of stabilizing employment in the event of a shock in a sector with low-interest rate sensitivity when some components of human capital are sector-specific.

Second, the usefulness of monetary policy as a tool for policymaking may vary by industry. The percentage of GDP attributed to industries with high-interest rate sensitivity will determine whether an interest rate-based monetary policy can have an impact on the economy (Raddatz and Rigobon, 2003). Third, there are differences in how monetary policy is disseminated to the various sectors. The mode of financial transmission varies according to industry characteristics.

There are many studies on monetary transmission in India at the aggregate level, but the sectoral level transmission mechanism and channels have received little attention.

This study tries to assess real output more thoroughly from a sectoral perspective. Instead of focusing on just one sector of the economy, it examines how a shock to monetary policy will affect all of them. The article analyses the various monetary channels in addition to the sectoral disaggregation. Moreover, in the last 6 years there, especially during the pandemic time, the government brought a lot of changes in the monetary policy framework and instruments to improve the condition of the economy and control inflation. These post covid scenarios of the economy as a whole and its impact on Indian corporates should be taken into consideration and the main purpose of this study. In this paper, we will be considering the Healthcare sector, Tourism, Information Technology, BFSI, Pharma, and Automobile sector.

II. REVIEW OF LITERATURE

A. Monetary Policies, Changes In Interest Rates, And Their Impact On The Overall Economy

1. VAR Analysis

Bernanke,(2002) studied the effects of monetary policy innovations on the economy. The paper stated one possible solution toZthis limited information challenge in their study, which blends classic structural VAR analysis with current breakthroughs in huge data set factor analysis. The paper discovered that the information used by our factor augmented VAR (FAVAR) methodology is crucial for correctly identifying the monetary transmission mechanism. Alam and Waheed, (2006) found whether monetary policies have economically significant effects on the real output or not and whether the economy responds differently to monetary shocks. The study looks at seven different economic sectors and calculates a VAR for each one as well as for total production. The sub-sample estimation reveals significant monetary tightening and a drop in aggregate output. Some of the sectors are more affected by monetary tightening According to Sensarma and Bhattacharyya(2016) efforts at fiscal while monetary policy tightening impacts the level of the term structure, it has a stronger impact at the shorter end. Consolidation could reduce the drag on resources and provide greater opportunities for corporate bonds although the demand from banks for government paper would continue to remain high in the foreseeable future on account of the Basel III Liquidity Coverage Ratio requirements

2. Economic Factors: GDP, Inflation, CPI

Mishkin, (2011) found that the Reserve Bank ended up financing large and increasing budget deficits. As a result, the base money and money supply grew faster than expected, resulting in substantial inflation. The rise in global commodity prices corresponded with a surge in domestic demand. A study on the relative importance of various transmission channels of monetary policy to GDP growth and inflation in India is done by Khundrakpam, Kumar and Jain, Rajeev(June 2012). External exogenous factors in India extend the impact of monetary policy transmission on GDP growth and inflation, according to a new study. With a two quarter lag, a positive policy shock causes credit contraction, which has a negative impact on GDP growth and inflation. The exchange rate channel is found to have an insignificant impact on GDP growth. The interest rate channel is found to account for about half of the total impact of monetary shocks on GDP growth.. In the research paper of Sagar and Koli, (2019) they analysed the selected macro-economic variable’s impact on GDP by regression analysis, it is found that there is an insignificant impact of interest rate, money supply M2 and inflation on GDP during the selected period of study. This study has revealed that inflation has an insignificant impact on GDP .Dua (2020) studied the change in rates by MPC and its impact on the Indian Economy. The study tells that for the years 2016 to 2020, the central government has set a CPI target of 4%. Due to supply shocks (food inflation, oil prices, etc.), there were numerous instances of high/unusual inflation. While other central banks throughout the world have taken monetary and regulatory measures in response to the worldwide epidemic, many governments have strengthened the monetary measures by imposing huge budgetary measures

3. Stock Market

Bhattacharyyaa and Sensarma (2007) studied the mechanism of monetary policy and changes/shifts in monetary policies of the Central Bank. The study states that in both the 1996– 2000 and 2000–2006 periods, the effects of monetary policy on stock market activity were minimal. As monetary policy signalling tools, new indirect instruments have evolved. The paper describes the monetary policies before 2007-2009 and monetary policy strategy implications.

B. Monetary Policies, Changes In Interest Rates, And Their Impact On Various Sectors

1. Sectoral Impact in Foreign Countries

Farès and Srour (2001) discovered that, at the level of final expenditures, exports respond swiftly to monetary contractions, investment responds far more than consumption of products, and services do not respond at all. Unsurprisingly, durable products respond to monetary contractions considerably more strongly than semi-durables, while nondurables have no noticeable response. Alternative specifications have no effect on the outcomes. Construction hits the trough of the cycle first at the production level after a monetary recession, whereas manufacturing reacts twice as strongly overall. The services sector has responded well, although it trails behind manufacturing.

The latter outcomes, on the other hand, are highly dependent on the model definition. Arnold and Vrugt,(2002) describe the impact of monetary policy shocks on the regional and sectoral output in the Netherlands for the period 1973 to 1993. The major findings of the study are that in the United Kingdom, the United States, and Germany, studies have identified industrial composition as a key explanatory variable for the regional transmission of monetary policy.

Other asset values, such as exchange rates and share prices, are also affected by monetary policy shocks.  Monetary policy has an impact on competitiveness and net exports via the exchange rate channel.

A study on the relationship between monetary policy and sectoral effects, conducted by Raddatz, Rigobon(2003) provides a new methodology in this work that allows us to analyse monetary policy's sectoral effects as well as its involvement in the transmission of sectoral shocks. They have applied their methodology to the United States and show that there are noteworthy disparities in how different sectors respond to monetary policy.

They have also shown that as a result of these disparities, a monetary policy rule aiming at stabilizing aggregate output and prices will have an unequal effect across sectors: sectors with high-interest rate sensitivity will see bigger cyclical fluctuations than those with low sensitivity. Findings also show that the sectoral "transfers" involved could be substantial. In other words, only by inducing relatively big expansions and contractions on high-interest rate sensitivity will monetary policy achieve stabilization. In the paper of Berument, Ceylan and Yucel (Turkey), September 2004 they have explained how production in various industrial sectors is affected by interest rates, as well as exchange rates, money aggregates, aggregated industrial production, and overall price level innovations in the Turkish economy.

The study evaluates the many ways in which various shocks affect an economy's industrial sectors. The effects of policy shocks on Turkish industrial production are explored for 29 sectors. In a statistically meaningful way, 10 of the 29 sectors respond to money and interest rate changes, and 9 of the 29 sectors respond to general price level changes.

?ahinöz and Co?ar,(2010) identified a remarkable difference that for the consumer non-durable and semi-durable goods-producing sectors. The contemporaneous correlations show that the growth cycles for most sectors have a high correlation with the growth cycle for total manufacturing.

The quarterly Industrial Production Index (IPI) is used to determine the cycles of Turkish manufacturing industries. The Turkish Statistical Institute (TurkStat) publishes the IPI, which covers the years from 1985 onwards. Ingale, (2012) found that the interest rate-sensitive sectors and companies with a larger debt-to-equity ratio will be most affected by the rising interest cost. Some of the sectors due to the nature of being more capital intensive like construction, power, telecom, etc are likely to be hit most due to their high leverage.

2. Sectoral impact in Indian Context

Ghosh, Saibal (January 2009) explained the magnitude of a monetary policy shock on industrial output. The findings suggest that the disparities in the reaction are mostly due to differences in industry size and working capital utilization intensity. The fraction of interest cost is also seen to play a significant influence. Singh and Rao (2014), suggest that monetary policy shock has a real influence at the aggregate level. We found that some sectors are more and others are less influenced by the monetary policy shock at the sectoral level.

In response to interest rate shocks, sectors such as S2 (mining and quarrying), S3 (manufacturing), S5 (building), and S6 (trade, lodging, transportation, and communications) appear to decrease more than aggregate production. These four areas appear to be the primary force behind the overall fluctuations.

Non-contrast, we see insensitivities to monetary policy shocks in sectors like S1 (agricultural and related activities) and S8 (community, social, and commercial services). S4 (electricity, gas, and water supply) and S7 (transport) are the two remaining sectors (finance, insurance, real estate, and business services), and are also moderately sensitive to monetary policy shocks. Real estate, automobiles, cement, and steel will be the hardest damaged industries.

The market for automobiles will be slowed by rising interest rates and commodity costs, which may even affect the Capex cycle, reducing demand for steel and cement. Banks may potentially face larger nonperforming assets (NPAs) in the future, limiting their credit expansion. IT companies were the least affected. The last time a scenario like this (increasing interest rates and commodity prices) occurred was in 2006-07.

III. RESEARCH METHODOLOGY

1. The 3 important sectors chosen for the research are IT, automobile, BFSI sector. The study includes how these sectors reacted to the monetary changes adopted by the government.
2. One large cap and one mid cap company is considered in the research which give clear picture of how companies with respect to their turnover mitigating and adopting to the monetary and macroeconomic changes.

Conclusion

This article analysed the relations between the sectoral output and the monetary variables in a multivariate setting to find out whether monetary policy shocks have uniform or varying sectoral effects. Real output as a whole is viewed as the result of production activity across four `different industries. The study also calculates a relationship between the monetary policy and the financial indicators for total production. as for each sector\'s production. This study demonstrates that a monetary policy shock causes aggregate output to drop, which is consistent with other findings. We discover that some sectors are more impacted by monetary tightening after analyzing sectoral output responses to a monetary shock. The primary cause of aggregate variations is these sectors. In essence, we discover that the sectors react to monetary policy in various ways. Therefore, the possible sectoral implications of the various monetary policy initiatives should be considered in order to fully reap their benefits. examined; taken into account. In order to inform future research with a longer time horizon, it would be helpful to compare the observed cyclicality of various sectors to the situation in which the shock was implemented.

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Copyright

Copyright © 2023 J Manish, Debrup Dutta Roy, Dr. Mercia Selva Malar. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.