This article employed a time-varying parameter vector autoregression (TVP-VAR) model with stochastic volatility to investigate the effectiveness of monetary policy on private consumption and private investment in India for the period between the first quarter of 2004–2005 and the second quarter of 2019–2020. The evidence from the time-varying responses indicates that the monetary policy shocks have large time-varying effects, and the effects are more noticeable in the short-term than in the medium- and long-term periods. The short-term forecasts for credit to the household sector and private consumption are positive and have seen a dramatic jump, only to be stabilised during the inflation-targeting period; however, in the contrary, the short-term forecast of credit to the private sector has seen a revival during the post global financial crisis (GFC) period, with a surge in private investment. The findings clearly highlight that the movements in bank credit and the bank lending rate explain the variations in private consumption and private investment for all periods (short-term, medium- and long-term) of the forecast, and it is attributed to a policy rate shock.
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