Monetary policy transmission has remained a pivotal topic of interest across all central bankers. Empirically, however, it is hard to dis-entangle the effects of a policy change on firms’ investment demand, banks’ credit supply and their interactions. This paper uses a unique ﬁrm-bank matched data set from India to provide new insights into the monetary policy transmission mechanism. The findings of the paper indicate that monetary policy transmission works with a lag for bank lending. For firms, aggregate demand conditions in the market may drive investment demand which may, in turn, be correlated with the monetary policy easing cycle. However, final credit flows from banks depend on the liquidity position of banks that the firms are attached to. These findings indicate the importance of banks’ liquidity in addition to the balance sheet channel for improving the efficacy of monetary policy transmission.
(Yogesh Dayal) Chief General Manager
Press Release: 2020-2021/892
* The Reserve Bank of India introduced the RBI Working Papers series in March 2011. These papers present research in progress of the staff members of the Reserve Bank and are disseminated to elicit comments and further debate. The views expressed in these papers are those of authors and not of the Reserve Bank of India. Comments and observations may kindly be forwarded to authors. Citation and use of such papers should consider its provisional character.