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What Explains Excess Liquidity of Banks? Empirical Evidence from India

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  • Md Gyasuddin Ansari

    (Indian Institute of Management Kozhikode)

  • Rudra Sensarma

    (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.

Suggested Citation

  • Md Gyasuddin Ansari & Rudra Sensarma, 2022. "What Explains Excess Liquidity of Banks? Empirical Evidence from India," Working papers 525, Indian Institute of Management Kozhikode.
    • Handle: RePEc:iik:wpaper:525
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    More about this item

    Keywords

    Excess Liquidity; Required Reserves; Exchange Rate; Autoregressive Distributed Lag; Panel Regression;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G00 - Financial Economics - - General - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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