Journal of Policy Modeling 38 (2016) 587–602 Available online at www.sciencedirect.com ScienceDirect The impact of monetary policy on corporate bonds in India Rudra Sensarma a,1 , Indranil Bhattacharyya b,∗,1 a Indian Institute of Management, Kozhikode, India b Reserve Bank of India, Mumbai, India Received 24 September 2015; received in revised form 2 February 2016; accepted 8 March 2016 Available online 19 March 2016 Abstract We analyse the impact of monetary policy on the shape of the corporate yield curve and credit spread using a macro-finance approach. Instead of estimating the latent factors from the data on corporate bonds, we use market proxies of level, slope and curvature of the corporate yield curve and credit spread. The results demonstrate that while monetary policy has the dominant impact among macroeconomic variables on the entire term structure, it is particularly strong at the short end and on credit spreads. Changes in credit spreads, in turn, also influence monetary policy. The results are robust to alternative identification schemes and have important policy implications for further development of the corporate bond market, particularly in emerging market economies. © 2016 The Society for Policy Modeling. Published by Elsevier Inc. All rights reserved. Keywords: Term structure; Yield curve; Monetary policy; SVAR JEL classification: C51; E44; E52 1. Introduction Corporate bonds are a key constituent of a modern financial sector as it plays a pivotal role in long term financing of an economy. A well-diversified financial system with balanced distribution ∗ Corresponding author at: Department of Economic and Policy Research, Reserve Bank of India, Amar Building (6th Floor), Fort, Mumbai 400001, India. Tel.: +91 22 22616064. E-mail address: ibhattacharya@rbi.org.in (I. Bhattacharyya). 1 We are grateful to the Editor and the anonymous referees for their valuable comments and suggestions. The views expressed in the paper are those of the authors and not of the institutions to which they belong. The usual disclaimer applies. http://dx.doi.org/10.1016/j.jpolmod.2016.03.004 0161-8938/© 2016 The Society for Policy Modeling. Published by Elsevier Inc. All rights reserved.