Abstract:
The US is India’s largest trading partner, followed by the European Union. Our study,
using the GVAR model, shows that a US Monetary Policy (MP) shock results in a
depreciation of the Indian currency vis-a-vis the dollar. This is due to Indian investors
preferring to invest in the US, which provides higher returns during a US MP shock.
The Eurozone MP shock does not have a significant impact due to the increasing
dollarization of the Indian economy. However, the US MP shock propagation
diminishes when there is economic policy uncertainty. Our findings have implications
for monetary policy conduct in India.
