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Stability of Lending Rate Stickiness: A Case Study of India

Author

Listed:
  • Sastry, D. V. S.
  • Singh, Balwant
  • Bhattacharya, Kaushik

Abstract

The paper postulates that in an environment of continuous financial reforms, the lending rate stickiness in an economy could be changing over the period. The financial reforms (of which deregulation of interest rates formed a major part) during the 1990s and the early 2000s and the changing role attributed to different policy rates during the reforms make India an interesting case study. The paper finds evidence of diminishing lending rate stickiness in case of India. During the major part of the study, Indian policymakers used the discount rate for policy signaling. The paper observes that as a result, the long-term rates like the lending rates did not react sufficiently to the changes in the short-term rates (e.g., repo rate) in this period unless the discount rate was also changed. Such behavior changed when policymakers started to use short-term rates like repo rates for policy signaling. Results in this paper suggest that when the impacts are added together, a change of 100 basis points in all policy rates towards the end of the reference period could change the lending rate in India almost by similar magnitude. These findings help to reconcile some of the contrasting findings on lending rate stickiness in case of India. Among possible factors still responsible for lending rate stickiness, the study identifies inelastic credit demand in India as an important factor. From policymaking perspective, however, it is postulated that as demand for personal and housing loans in India are likely to increase in future due to demographic factor, it is likely that such increase could tend to increase inflexibility in loan rates.

Suggested Citation

  • 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.
  • Handle: RePEc:pra:mprapa:26570
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    File URL: https://mpra.ub.uni-muenchen.de/26570/1/MPRA_paper_26570.pdf
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    References listed on IDEAS

    as
    1. Bakhtiar Moazzami, 1999. "Lending rate stickiness and monetary transmission mechanism: the case of Canada and the United States," Applied Financial Economics, Taylor & Francis Journals, vol. 9(6), pages 533-538.
    2. International Monetary Fund, 2005. "Monetary Policy and Corporate Behavior in India," IMF Working Papers 05/25, International Monetary Fund.
    3. Carlo Cottarelli & Giovanni Ferri & Andrea Generale, 1995. "Bank Lending Rates and Financial Structure in Italy: A Case Study," IMF Staff Papers, Palgrave Macmillan, vol. 42(3), pages 670-700, September.
    4. Clements,Michael & Hendry,David, 1998. "Forecasting Economic Time Series," Cambridge Books, Cambridge University Press, number 9780521632423, October.
    5. Solange Berstein & J. Rodrigo Fuentes, 2004. "Is There Lendign Rate Stickiness in the Chilean Banking Industry?," Central Banking, Analysis, and Economic Policies Book Series,in: Luis Antonio Ahumada & J. Rodrigo Fuentes & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Se (ed.), Banking Market Structure and Monetary Policy, edition 1, volume 7, chapter 6, pages 183-210 Central Bank of Chile.
    6. Hannan, Timothy H & Berger, Allen N, 1991. "The Rigidity of Prices: Evidence from the Banking Industry," American Economic Review, American Economic Association, vol. 81(4), pages 938-945, September.
    7. Heffernan, Shelagh A, 1997. "Modelling British Interest Rate Adjustment: An Error Correction Approach," Economica, London School of Economics and Political Science, vol. 64(254), pages 211-231, May.
    8. International Monetary Fund, 2005. "Competition in Indian Banking," IMF Working Papers 05/141, International Monetary Fund.
    9. Philip Lowe & Thomas Rohling, 1992. "Loan Rate Stickiness: Theory and Evidence," RBA Research Discussion Papers rdp9206, Reserve Bank of Australia.
    10. Breusch, Trevor S & Wickens, Michael R., 1987. "Dynamic Specification, the Long Run and the Estimation of Transformed Regression Models," CEPR Discussion Papers 154, C.E.P.R. Discussion Papers.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Lending Rate Stickiness; Discount Rate Addiction; Monetary Policy Transmission;

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates

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