What Explains Excess Liquidity of Banks? Empirical Evidence from India

Md Gyasuddin Ansari and Rudra Sensarma

Journal of Emerging Market Finance, 2022, vol. 21, issue 4, 477-503

Abstract: We study excess liquidity in the banking system using data for India during 2005–2020. We apply Autoregressive Distributed Lag model and panel regressions to identify the factors determining excess liquidity at both aggregate and bank levels. We find that required reserves, private sector credit, and government securities held by banks have negative, positive, and negative effects on excess liquidity, respectively. Other factors such as exchange rate and inter-bank call rate have varying effects at the two levels. Our results suggest that banks can chalk out mechanisms to optimize their liquidity management and avoid the cost of excess liquidity. JEL Classifications: C23, E50, E58, G00, G21

Keywords: Excess liquidity; required reserves; exchange rate; autoregressive distributed lag; panel regression (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:sae:emffin:v:21:y:2022:i:4:p:477-503

DOI: 10.1177/09726527221101134

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