What Explains Excess Liquidity of Banks? Empirical Evidence from India

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

No 525, Working papers from Indian Institute of Management Kozhikode

Abstract: : We study excess liquidity in the banking system as well as at bank level in India. We apply Autoregressive Distributed Lag model for the aggregate level estimation and standard panel regressions for bank level estimation. We find different factors responsible for the prevalence of excess liquidity in the banking system as a whole and at the bank level. The common factors which are responsible for build-up of excess liquidity are required reserves, exchange rate and call rate. For instance, we find that the response of excess liquidity to required reserves is negative at both aggregate and bank-level. At the aggregate level, excess liquidity reacts negatively to exchange rate and positively to the inter-bank call rate. However, at the banklevel, exchange rate has a positive effect while the call rate has a negative effect on excess liquidity.

Keywords: Excess Liquidity; Required Reserves; Exchange Rate; Autoregressive Distributed Lag; Panel Regression (search for similar items in EconPapers)
Pages: 32 pages
Date: 2022-03
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Citations: View citations in EconPapers (2)

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Journal Article: What Explains Excess Liquidity of Banks? Empirical Evidence from India (2022)
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