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Monetary Policy and Corporate Behaviour in India

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  • International Monetary Fund

Abstract

The paper examines the association and corporate behavior for a sample of manufacturing firms in India for the post-reform period 1992-2003. The findings suggest that a contractionary monetary policy lowers overall debt including bank debt, although the lagged response is positive, and listed firms increase their short-term bank borrowings, after monetary tightening. The responses of corporates to a monetary contraction in the post-1997 period has been more pronounced. A disaggregated analysis of responses of firms according to size and leverage largely validates these findings. Two policy implications emerge from the analysis. First, the interest rate transmission channel has strengthened since 1998, and, second, corporates in India, especially listed ones, seem to exhibit relationship lending.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 05/25.

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Length: 25
Date of creation: 01 Feb 2005
Date of revision:
Handle: RePEc:imf:imfwpa:05/25

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Keywords: Governance; monetary policy; bank debt; central bank; bank borrowings; bank borrowing; transmission of monetary policy; banking; monetary fund; tight monetary policy; monetary transmission; contractionary monetary policy; monetary shocks; bank loans; bank of england; bank financing; bank lending; bank finance; development banking; resource allocation; monetary control; open market operations; bank rate; monetary shock; monetary regimes; working capital; cost of credit; banking sector; banking industry; bank behavior; bank deposits; monetary stance; retained earnings; monetary management; monetary policy regime; financial risk; interbank market; clearing house; interest expense; monetary theory; settlement risk; government securities; monetary transmission mechanism; dividend policy;

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References

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  1. Anil K Kashyap & Jeremy C. Stein & David W. Wilcox, 1992. "Monetary Policy and Credit Conditions: Evidence From the Composition of External Finance," NBER Working Papers 4015, National Bureau of Economic Research, Inc.
  2. Reinhart, Carmen & Calvo, Guillermo, 2002. "Fear of floating," MPRA Paper 14000, University Library of Munich, Germany.
  3. Michael Ehrmann, 2004. "Firm Size and Monetary Policy Transmission – Evidence from German Business Survey Data," CESifo Working Paper Series 1201, CESifo Group Munich.
  4. Sims, Christopher A. & Zha, Tao, 2006. "Does Monetary Policy Generate Recessions?," Macroeconomic Dynamics, Cambridge University Press, vol. 10(02), pages 231-272, April.
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  6. Kashyap, Anil K & Stein, Jeremy C & Wilcox, David W, 1996. "Monetary Policy and Credit Conditions: Evidence from the Composition of External Finance: Reply," American Economic Review, American Economic Association, vol. 86(1), pages 310-14, March.
  7. Ben S. Bernanke & Alan S. Blinder, 1989. "The federal funds rate and the channels of monetary transmission," Working Papers 89-10, Federal Reserve Bank of Philadelphia.
  8. Miller, Merton H & Rock, Kevin, 1985. " Dividend Policy under Asymmetric Information," Journal of Finance, American Finance Association, vol. 40(4), pages 1031-51, September.
  9. Jayati Sarkar & Subrata Sarkar, 2000. "Large Shareholder Activism in Corporate Governance in Developing Countries: Evidence from India," International Review of Finance, International Review of Finance Ltd., vol. 1(3), pages 161-194.
  10. Rajan, Raghuram G, 1992. " Insiders and Outsiders: The Choice between Informed and Arm's-Length Debt," Journal of Finance, American Finance Association, vol. 47(4), pages 1367-400, September.
  11. Dedola, Luca & Lippi, Francesco, 2000. "The Monetary Transmission Mechanism: Evidence from the Industries of Five OECD Countries," CEPR Discussion Papers 2508, C.E.P.R. Discussion Papers.
  12. Mizen, Paul & Yalcin, Cihan, 2003. "Corporate Finance when Monetary Policy Tightens: How do Banks and Non-Banks Affect Access to Credit?," EIFC - Technology and Finance Working Papers 18, United Nations University, Institute for New Technologies.
  13. Yunus Aksoy & Miguel León-Ledesma, 2004. "Interest Rates and Output in the Long-run," Studies in Economics 0409, Department of Economics, University of Kent.
  14. David Cobham & Ramesh Subramaniam, 1995. "Corporate Finance in Developing Countries: New Evidence for India," CRIEFF Discussion Papers 9512, Centre for Research into Industry, Enterprise, Finance and the Firm.
  15. Stephen D. Oliner & Glenn D. Rudebusch, 1994. "Is there a broad credit channel for monetary policy?," Working Paper Series / Economic Activity Section 146, Board of Governors of the Federal Reserve System (U.S.).
  16. Anil K Kashyap & Jeremy C. Stein, 1997. "What Do a Million Banks Have to Say About the Transmission of Monetary Policy?," NBER Working Papers 6056, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Ghosh, Saibal & Ghosh, Saurabh, 2006. "Impact of Liquidity constraint on Firms’ Investment Decisions," MPRA Paper 17181, University Library of Munich, Germany.
  2. Ghosh, Saibal, 2007. "Relationship Lending and Financing Constraints: Firm-Level Evidence for India," MPRA Paper 24253, University Library of Munich, Germany.
  3. Aleem, Abdul, 2010. "Transmission mechanism of monetary policy in India," Journal of Asian Economics, Elsevier, vol. 21(2), pages 186-197, April.
  4. Kaushik Bhattacharya, 2006. "Monetary policy approaches in India," BIS Papers chapters, in: Bank for International Settlements (ed.), Monetary policy in Asia: approaches and implementation, volume 31, pages 74-102 Bank for International Settlements.
  5. Nachane, Dilip & Ghosh, Saibal & Ray, Partha, 2006. "Basel II and bank lending behavior: Some likely implications for monetary policy in India," MPRA Paper 3840, University Library of Munich, Germany.
  6. Ghosh, Saibal, 2006. "Monetary policy and bank behavior: Empirical evidence from India," MPRA Paper 17395, University Library of Munich, Germany.
  7. Saibal Ghosh, 2006. "Do board characteristics affect corporate performance? Firm-level evidence for India," Applied Economics Letters, Taylor & Francis Journals, vol. 13(7), pages 435-443.
  8. Ghosh, Saibal, 2010. "Firm Characteristics, Financial Composition and Response to Monetary Policy: Evidence from Indian Data," MPRA Paper 24717, University Library of Munich, Germany.
  9. Majumdar, Raju, 2013. "A Reinterpretation of the Relation between Market-to-book ratio and Corporate Borrowing," MPRA Paper 52398, University Library of Munich, Germany.
  10. Bank for International Settlements, 2006. "Monetary policy in Asia: approaches and implementation," BIS Papers, Bank for International Settlements, number 31, May.
  11. Sastry, D. V. S. & Singh, Balwant & Bhattacharya, Kaushik, 2009. "Stability of Lending Rate Stickiness: A Case Study of India," MPRA Paper 26570, University Library of Munich, Germany.

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