Response of Bank Lending to Monetary Policy in India: Does Liquidity Matter?Abstract: We examine the role of bank liquidity in monetary policy transmission in India. We apply threshold panel regression with liquid assets of banks as the threshold variable. Using annual data for Indian banks covering the period 2005-2017, we find that there is a negative impact of monetary policy tightening on bank lending. In a low liquidity regime, banks react more strongly to monetary policy as compared to in a high liquidity regime. The reaction of different bank groups (public sector and private sector banks) to monetary policy is heterogenous across the liquidity regimes. Our results suggest that for effective transmission of monetary policy, any abundant liquidity with public sector banks must be neutralized by the monetary authority

Md Gyasuddin, Ansari; Rudra, Sensarma

Response of Bank Lending to Monetary Policy in India: Does Liquidity Matter?Abstract: We examine the role of bank liquidity in monetary policy transmission in India. We apply threshold panel regression with liquid assets of banks as the threshold variable. Using annual data for Indian banks covering the period 2005-2017, we find that there is a negative impact of monetary policy tightening on bank lending. In a low liquidity regime, banks react more strongly to monetary policy as compared to in a high liquidity regime. The reaction of different bank groups (public sector and private sector banks) to monetary policy is heterogenous across the liquidity regimes. Our results suggest that for effective transmission of monetary policy, any abundant liquidity with public sector banks must be neutralized by the monetary authority

Ansari Md Gyasuddin () and Sensarma Rudra ()
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Ansari Md Gyasuddin: Indian Institute of Management Kozhikode
Sensarma Rudra: Indian Institute of Management Kozhikode

No 428, Working papers from Indian Institute of Management Kozhikode

Keywords: Monetary policy transmission; Panel Threshold Regression; Liquidity; Bank Lending; Lending Channel. (search for similar items in EconPapers)
Pages: 33 pages
Date: 2021-03
New Economics Papers: this item is included in nep-cba and nep-mon
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