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The Effect of Changes in the Policy Rates on Borrowing and Lending of Banks in India

In: Revisiting the Indian Financial Sector

Author

Listed:
  • Aditya Banerjee

    (Indian Institute of Management Ranchi)

  • Samit Paul

    (Indian Institute of Management Calcutta)

Abstract

This study examines the effect of central bank’s repo rate changes on commercial bank balance sheet items, borrowing, lending, investment, and deposits. More specifically, it explains the relationship between the change of repo rate on bank borrowings and lending at individual bank level. Further, it also examines the more immediate impact of repo rate changes on aggregate bank lending and borrowing with the help of breakpoint tests, which has not been addressed sufficiently by earlier researches. This study is carried out in two parts—firstly, a panel data analysis has been performed with generalized methods of moments (GMM) using data from 43 Indian banks over the period of 12 years, and secondly, a Chow breakpoint analysis has been done with fortnightly bank business data. The findings from panel data analysis suggest that monetary policy decisions have highly significant and positive impact on banks’ annual borrowings and loans. Results of breakpoint study indicate that the effects of policy-level announcements are more impactful and sustaining for bank credit but do not affect banks’ interbank liabilities. Overall, this study explains how monetary policy decisions of the central bank in India are transmitted to the commercial banks.

Suggested Citation

  • Aditya Banerjee & Samit Paul, 2022. "The Effect of Changes in the Policy Rates on Borrowing and Lending of Banks in India," India Studies in Business and Economics, in: Paramita Mukherjee (ed.), Revisiting the Indian Financial Sector, pages 173-185, Springer.
    • Handle: RePEc:spr:isbchp:978-981-16-7668-0_9
    DOI: 10.1007/978-981-16-7668-0_9
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