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Determinants, Persistence and value implications of liquidity creation: An evidence from Indian Banks

Grover, Naina and Sinha, Pankaj (2019): Determinants, Persistence and value implications of liquidity creation: An evidence from Indian Banks.

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Abstract

This study explores the micro and macro factors affecting liquidity created by Scheduled Commercial banks (excluding Regional Rural Bank) in India using the Generalized Method of Moments. Two measures of liquidity creation, the broad and narrow measures, were formed using RBI data available on Indian banks for the period 2005 to 2018. The study found that the variation in the broad measure was explained by equity ratio, market share, GDP, gross savings and lending rate whereas narrow measure was explained by equity ratio, market share, size and lending rate. Profitability and operating profit ratios did not affect liquidity creation. The crisis negatively affected both the measures of liquidity creation. The impact was more severe for the broad measure as compared to the narrow measure. We found the negative influence of capital on liquidity created by banks, which confirms that the implementation of Basel III norms in Indian banks will have negative implications for liquidity creation. Banks are perceived positively in the market when they create more liquidity.

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