Monetary Policy and Subnational Borrowing: Price Transmission without Quantity Adjustment in India

Monetary Policy and Subnational Borrowing: Price Transmission without Quantity Adjustment in India | Research Square window.SnipcartSettings = { analytics: { enabled: false } }; (function() { var accessVector = localStorage.getItem('access_vector') || ''; window.dataLayer = window.dataLayer || []; if (accessVector) { window.dataLayer.push({ user: { profile: { profileInfo: { snid: accessVector } } } }); } })(); (function(w,d,s,l,i){w[l]=w[l]||[];w[l].push({'gtm.start':new Date().getTime(),event:'gtm.js'});var f=d.getElementsByTagName(s)[0],j=d.createElement(s),dl=l!='dataLayer'?'&l='+l:'';j.async=true;j.src='https://www.googletagmanager.com/gtm.js?id='+i+dl;f.parentNode.insertBefore(j,f);})(window,document,'script','dataLayer','GTM-K279D39R'); Browse Preprints In Review Journals COVID-19 Preprints AJE Video Bytes Research Tools Research Promotion AJE Professional Editing AJE Rubriq About Preprint Platform In Review Editorial Policies Our Team Advisory Board Help Center Sign In Submit a Preprint Cite Share Download PDF Research Article Monetary Policy and Subnational Borrowing: Price Transmission without Quantity Adjustment in India Ashraful Khalq This is a preprint; it has not been peer reviewed by a journal. https://doi.org/ 10.21203/rs.3.rs-9507005/v1 This work is licensed under a CC BY 4.0 License Status: Posted Version 1 posted You are reading this latest preprint version Abstract This paper examines whether monetary policy disciplines subnational borrowing in India using a high-frequency panel of 18 states from April 2008 to December 2024. It develops a dynamic fiscal framework that embeds monetary transmission—through interest rate and liquidity channels—into subnational budget constraints, yielding ambiguous theoretical predictions for borrowing costs under policy tightening. Empirically, the analysis exploits high-frequency variation in policy rates and liquidity conditions within a panel framework that controls for unobserved state heterogeneity and common shocks, enabling identification of both price and quantity responses of subnational borrowing. Three findings emerge. First, borrowing is highly persistent, reflecting binding debt commitments and rollover constraints. Second, monetary policy is effectively transmitted to borrowing costs: policy rates and liquidity instruments significantly influence coupon rates and spreads, indicating strong price transmission. Third, this does not translate into lower borrowing volumes; the quantity response is weak and statistically insignificant. The results highlight that monetary policy affects the price—but not the quantity—of subnational borrowing, underscoring the central role of fiscal institutions in enforcing discipline in decentralized fiscal systems. JEL Codes: E52, E62, H62, H74, C23 Monetary policy Subnational borrowing FRBM Fiscal federalism Public debt India Liquidity Full Text Additional Declarations No competing interests reported. Cite Share Download PDF Status: Posted Version 1 posted You are reading this latest preprint version Research Square lets you share your work early, gain feedback from the community, and start making changes to your manuscript prior to peer review in a journal. As a division of Research Square Company, we’re committed to making research communication faster, fairer, and more useful. We do this by developing innovative software and high quality services for the global research community. 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Also discoverable on Platform About Our Team In Review Editorial Policies Advisory Board Help Center Resources Author Services Accessibility API Access RSS feed Manage Cookie Preferences © Research Square 2026 | ISSN 2693-5015 (online) Privacy Policy Terms of Service Do Not Sell My Personal Information {"props":{"pageProps":{"initialData":{"identity":"rs-9507005","acceptedTermsAndConditions":true,"allowDirectSubmit":true,"archivedVersions":[],"articleType":"Research Article","associatedPublications":[],"authors":[{"id":628900016,"identity":"3e0f6751-d503-4114-8ba4-797ae1143383","order_by":0,"name":"Ashraful Khalq","email":"data:image/png;base64,iVBORw0KGgoAAAANSUhEUgAAAZAAAAAyAQMAAABI0h/eAAAABlBMVEX///8AAABVwtN+AAAACXBIWXMAAA7EAAAOxAGVKw4bAAAA/klEQVRIiWNgGAWjYFACHiC2YZCRkGBgPMBQAeQwMzcQoSWNgQeoheEAwxmQFkZStDC2gUQIaOHvP3vsw4+EwzySs5sfHHg7rzaavx2o5UfFNpxaJG7kJc/sAWqRljlmcHDutuO5Mw4zNjD2nLmN25obPMYMvD8O88hJJBgc5t12LLcBqIWZsQ23FvnzZ4wZ/ySAtKR/OMw751jufEJaDA7kGDPzgBwmkQO0paEmdwMhLYY3gFpkEtJ5JGfkFBycc+xA7kagloP4/CIHctibBGs5iRvpGx+8qanLnXf+8MEHPyrweB8F8DAcBtMHiFQP1lJHvOJRMApGwSgYMQAAf4FdkS0G8RgAAAAASUVORK5CYII=","orcid":"","institution":"Centre For Development Studies","correspondingAuthor":true,"prefix":"","firstName":"Ashraful","middleName":"","lastName":"Khalq","suffix":""}],"badges":[],"createdAt":"2026-04-23 12:55:28","currentVersionCode":1,"declarations":"","doi":"10.21203/rs.3.rs-9507005/v1","doiUrl":"https://doi.org/10.21203/rs.3.rs-9507005/v1","draftVersion":[],"editorialEvents":[],"editorialNote":"","failedWorkflow":false,"files":[{"id":108007182,"identity":"d8c58c1b-1f39-450a-8a94-98ffc91add0d","added_by":"auto","created_at":"2026-04-28 12:58:48","extension":"pdf","order_by":1,"title":"","display":"","copyAsset":false,"role":"manuscript-pdf","size":390277,"visible":true,"origin":"","legend":"","description":"","filename":"Manuscript.pdf","url":"https://assets-eu.researchsquare.com/files/rs-9507005/v1_covered_710868be-9f8b-4a2a-8865-3b3ab7460fc9.pdf"}],"financialInterests":"No competing interests reported.","formattedTitle":"Monetary Policy and Subnational Borrowing: Price Transmission without Quantity Adjustment in India","fulltext":[],"fulltextSource":"","fullText":"","funders":[],"hasAdminPriorityOnWorkflow":false,"hasManuscriptDocX":false,"hasOptedInToPreprint":true,"hasPassedJournalQc":"","hasAnyPriority":true,"hideJournal":true,"highlight":"","institution":"","isAcceptedByJournal":false,"isAuthorSuppliedPdf":true,"isDeskRejected":"","isHiddenFromSearch":false,"isInQc":false,"isInWorkflow":false,"isPdf":true,"isPdfUpToDate":true,"isWithdrawnOrRetracted":false,"journal":{"display":true,"email":"[email protected]","identity":"researchsquare","isNatureJournal":false,"hasQc":true,"allowDirectSubmit":true,"externalIdentity":"","sideBox":"","snPcode":"","submissionUrl":"/submission","title":"Research Square","twitterHandle":"researchsquare","acdcEnabled":true,"dfaEnabled":false,"editorialSystem":"","reportingPortfolio":"","inReviewEnabled":false,"inReviewRevisionsEnabled":true},"keywords":"Monetary policy, Subnational borrowing, FRBM, Fiscal federalism, Public debt, India, Liquidity","lastPublishedDoi":"10.21203/rs.3.rs-9507005/v1","lastPublishedDoiUrl":"https://doi.org/10.21203/rs.3.rs-9507005/v1","license":{"name":"CC BY 4.0","url":"https://creativecommons.org/licenses/by/4.0/"},"manuscriptAbstract":"\u003cp\u003eThis paper examines whether monetary policy disciplines subnational borrowing in India using a high-frequency panel of 18 states from April 2008 to December 2024. 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