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Bank Capital and Monetary Policy Transmission in India

Muduli, Silu and Behera, Harendra (2020): Bank Capital and Monetary Policy Transmission in India. Published in: Macroeconomics and Finance in Emerging Market Economies (24 May 2021)

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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 credit supply of banks depending on their capital position.

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