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Bank capital and monetary policy transmission in India

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  • Silu Muduli
  • Harendra Behera

Abstract

This paper examines the role of bank capital in monetary policy transmission in India during the post-global financial crisis period. Empirical results show that banks with higher capital-to-risk-weighted assets ratio (CRAR) raise funds at a lower cost. Additionally, banks with higher CRAR transmit monetary policy impulses smoothly, while stressed assets in the banking sector hinder transmission. Recapitalization to raise CRAR can improve transmission; however, CRAR above a certain threshold level may not help as the sensitivity of loan growth to monetary policy rate reduces for banks with CRAR above the threshold. Therefore, it can be concluded that monetary policy can influence the credit supply of banks depending on their capital position.

Suggested Citation

  • Silu Muduli & Harendra Behera, 2023. "Bank capital and monetary policy transmission in India," Macroeconomics and Finance in Emerging Market Economies, Taylor & Francis Journals, vol. 16(1), pages 32-56, January.
    • Handle: RePEc:taf:macfem:v:16:y:2023:i:1:p:32-56
    DOI: 10.1080/17520843.2021.1918461
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    Cited by:

    1. Pravakar Sahoo & Ashwani Bishnoi, 2021. "Investment Slowdown in India: Role of Fiscal-Monetary policy and Economic Uncertainty," IEG Working Papers 439, Institute of Economic Growth.
    2. Pravakar Sahoo & Ashwani Bishnoi, 2021. "Investment Behavior in India: What led to Investment Slowdown and how to Revive it?," IEG Working Papers 436, Institute of Economic Growth.

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    More about this item

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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