The Reserve Bank of India today placed on its website a Working Paper titled “Bank Capital and Monetary Policy Transmission in India” under the Reserve Bank of India Working Paper Series*. The paper is authored by Silu Muduli and Harendra Behera.
The paper examines the role of bank capital in monetary policy transmission in India during the post-global financial crisis period. Bank capital channel explains how monetary policy can affect bank lending by impacting the overall capital position of a bank. Thus, capital can have an important role in both lending and borrowing behaviour of banks.
Major findings of the paper are:
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Banks with higher capital to risk-weighted assets ratio (CRAR) raise funds at a lower cost.
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Banks with higher CRAR transmit monetary policy impulses smoothly, while stressed assets in the banking sector hinder transmission.
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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.
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Monetary policy, thus, can influence credit flows in the economy depending on the capital position of banks.
(Yogesh Dayal) Chief General Manager
Press Release: 2020-2021/502
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