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Monetary Policy, Interbank Liquidity, and Lending Behavior of Banks in India

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  • Md Gyasuddin Ansari
  • Rudra Sensarma

Abstract

We investigate the role of interbank liquidity in monetary policy transmission in India. We employ standard and dynamic panel regression methods to analyze data for 48 commercial banks during the period 1999–2018 and 2019–2023. We find a significant role of interbank liquidity in easing the negative impact of monetary policy tightening on bank lending during the first period when the reliance of banks on the interbank market was rising. We also find a heterogeneous role of interbank liquidity in monetary policy transmission across public sector and private sector banks. The policy implication for the monetary authority in India is that, at times of high reliance on the interbank market, managing the net liquidity positions of banks is necessary to realize the desired effects of monetary policy. JEL Codes: C23, E52, E58, G21

Suggested Citation

  • Md Gyasuddin Ansari & Rudra Sensarma, 2025. "Monetary Policy, Interbank Liquidity, and Lending Behavior of Banks in India," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 24(2), pages 194-217, June.
    • Handle: RePEc:sae:emffin:v:24:y:2025:i:2:p:194-217
    DOI: 10.1177/09726527241306552
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    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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