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Incomplete reform or opportunity: the role of the banking sector in the credit transmission mechanism in India

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  • Anurag Sharma

Abstract

The recent financial crisis in developed economies is attributed to the credit crunch and features of a free market economy. One main concern is the spreading of this crisis to emerging economies. This paper tests the importance of the banking sector as a credit transmission channel in India. The empirical analysis discovers a structurally stable long-run relationship (immune to exogenous shocks) between bank credit and interest rate spread. This suggests that the reform process has not yet reached an extent where capital markets are fully competitive and banks' role in credit formation remains significant, suggesting India's reduced exposure to the current financial crisis.

Suggested Citation

  • Anurag Sharma, 2008. "Incomplete reform or opportunity: the role of the banking sector in the credit transmission mechanism in India," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 11(4), pages 273-288.
  • Handle: RePEc:taf:jpolrf:v:11:y:2008:i:4:p:273-288
    DOI: 10.1080/17487870802567315
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    References listed on IDEAS

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    1. Valerie Cerra & Sweta Chaman Saxena, 2002. "What Caused the 1991 Currency Crisis in India?," IMF Staff Papers, Palgrave Macmillan, vol. 49(3), pages 1-5.
    2. Kashyap, Anil K. & Stein, Jeremy C., 1995. "The impact of monetary policy on bank balance sheets," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 42(1), pages 151-195, June.
    3. Anil K. Kashyap & Jeremy C. Stein, 1994. "Monetary Policy and Bank Lending," NBER Chapters,in: Monetary Policy, pages 221-261 National Bureau of Economic Research, Inc.
    4. V. Hugo Juan-Ramon & Ruby Randall & Oral Williams, 2001. "A Statistical Analysis of Banking Performance in the Eastern Caribbean Currency Union in the 1990s," IMF Working Papers 01/105, International Monetary Fund.
    5. Bhide, M G & Prasad, A & Ghosh, Saibal, 2001. "Emerging Challenges in Indian Banking," MPRA Paper 1711, University Library of Munich, Germany.
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