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Bank capital channel of monetary policy: panel data evidence for India

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  • Shelja Bhatia

    (Reserve Bank of India)

Abstract

The paper explores the first leg of monetary policy transmission via bank capital channel by studying the impact of monetary policy on equity capital of banks. Using a panel data of 26 banks for the period 2004–05 to 2019–20, it is observed that monetary policy has a significant impact on the equity capital of banks through its effect on interest margins. An expansionary monetary policy is found to increase the profitability of Indian banks which expands their stock of equity capital enabling banks to increase their supply of credit. This has positive implications for investment, consumption, and aggregate output in the economy. Overall, the analysis suggests that bank capital is an important channel in exploring the monetary policy transmission in India.

Suggested Citation

  • Shelja Bhatia, 2023. "Bank capital channel of monetary policy: panel data evidence for India," Indian Economic Review, Springer, vol. 58(2), pages 423-443, September.
    • Handle: RePEc:spr:inecre:v:58:y:2023:i:2:d:10.1007_s41775-023-00173-0
    DOI: 10.1007/s41775-023-00173-0
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    More about this item

    Keywords

    Monetary policy; Bank capital; Capital requirements; Panel data;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models

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