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Bank Capital and Monetary Policy Transmission in India

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  • Muduli, Silu
  • Behera, Harendra

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. Bank recapitalization to raise CRAR can improve the 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 credit supply of banks depending on their capital position.

Suggested Citation

  • Muduli, Silu & Behera, Harendra, 2020. "Bank Capital and Monetary Policy Transmission in India," EconStor Preprints 225238, ZBW - Leibniz Information Centre for Economics.
    • Handle: RePEc:zbw:esprep:225238
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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

    Keywords

    Monetary policy; Bank capital; Bank lending;
    All these keywords.

    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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