Portfolio Rebalancing and Consumption Response of Households to Monetary Policy Shocks

Using micro-level administrative data from India, we examine the portfolio rebalancing and consumption response of households to changes in interest rate. By exploiting variation in the timing of expiry of term deposits, we find that when interest rate falls, households rebalance their portfolio from safe assets to risky assets. We estimate the interest elasticity of risky investment to be -26 and the interest elasticity of consumption to be -0.3. The effects on consumption and risky investment are smaller for term depositors with automatic renewal. Households with existing loans have a larger consumption effect but a smaller portfolio rebalancing effect.