Title: Does global spillover matter in the Indian money market? A vector error correction model

Authors: Avijit Bakshi; Pujari Sudharsana Reddy

Addresses: Alliance University – Central Campus, Chikkahadage Cross, Chandapura-Anekal Main Road, Bengaluru, Karnataka 562106, India ' CMS Business School, JAIN (Deemed-to-be University), No. 17, Sheshadri Road, Gandhi Nagar, Bengaluru-560009, Karnataka, India

Abstract: This study investigates the impact of transmission channels, including global liquidity, confidence, and exchange, on the Indian money market. The research aims to identify the predominant transmission channel and its influence on the repo and call money rates. A vector error correction model (VECM) analysed weekly data collected from the Reserve Bank of India, Bank of St. Louis, and Federal Reserve Bank from 29 April 2001 to 21 March 2021. The study finds a stable, genuine long-term relationship between call money rates and global liquidity, confidence channels and exchange channels. A long-run causality is also observed between call money rates and broad market indicators. Repo rates similarly exhibit a long-term, stable relationship with these factors, with short-term impacts observed from global liquidity and the exchange channel, but not from the VIX. The exchange channel and VIX are proven to be more predominant in influencing policy and call money rates.

Keywords: global spillover; vector error correction model; VECM; weighted average call money rate; WACR; repo rate; confidence channel.

DOI: 10.1504/IJICBM.2025.144042

International Journal of Indian Culture and Business Management, 2025 Vol.34 No.1, pp.113 - 133

Received: 09 Jun 2023
Accepted: 24 Jun 2023
Published online: 22 Jan 2025 *

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