The Monetary “Black Box” in India Revisited: Nonlinear Transmission Across Yield Regimes

This study re-examines the monetary “black box” in India by investigating whether monetary-policy transmission is state-dependent across different interest-rate environments. Using quarterly data spanning 1993Q1–2024Q2, it constructs a Taylor rule-based monetary-policy shock to mitigate the endogeneity of raw policy rates and estimates dynamic discrete-threshold regressions with endogenously determined regimes. The results provide strong evidence of nonlinearity and structural instability in India’s transmission process. For real output, the weighted average call money rate (WACR) emerges as the more informative threshold variable, while wholesale price inflation is more effectively segmented by the 91-day Treasury bill yield. The findings show that the contractionary effect of monetary policy on output is most evident in the intermediate-rate regime, whereas low- and high-rate regimes exhibit weaker or counterintuitive short-run responses, consistent with crisis accommodation, delayed pass-through, and state-specific frictions. For inflation, monetary tightening is associated with a short-run price puzzle in low- and intermediate-yield regimes but produces the expected disinflationary effect in the high-yield regime. Across channels, the credit and asset-price channels matter selectively for output, while the exchange-rate channel is the most relevant for inflation only in the intermediate regime. Overall, the evidence suggests that monetary-policy transmission in India is regime-dependent and that policy assessment should distinguish between operating-rate conditions and broader market-rate regimes.