Monetary Policy, Interbank Liquidity, and Lending Behavior of Banks in India

Md Gyasuddin Ansari and Rudra Sensarma

Journal of Emerging Market Finance, 2025, vol. 24, issue 2, 194-217

Abstract: We investigate the role of interbank liquidity in monetary policy transmission in India. We employ standard and dynamic panel regression methods to analyze data for 48 commercial banks during the period 1999–2018 and 2019–2023. We find a significant role of interbank liquidity in easing the negative impact of monetary policy tightening on bank lending during the first period when the reliance of banks on the interbank market was rising. We also find a heterogeneous role of interbank liquidity in monetary policy transmission across public sector and private sector banks. The policy implication for the monetary authority in India is that, at times of high reliance on the interbank market, managing the net liquidity positions of banks is necessary to realize the desired effects of monetary policy. JEL Codes: C23, E52, E58, G21

Keywords: Monetary policy transmission; interbank liquidity; bank lending; panel regression; call rate (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:sae:emffin:v:24:y:2025:i:2:p:194-217

DOI: 10.1177/09726527241306552

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