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Financial Repression, Deposit Rate Deregulation, and Bank Market Power

Author

Listed:
  • Yogeshwar Bharat

    (Centre for Advanced Financial Research and Learning (CAFRAL))

  • Subhadeep Halder

    (NYU Abu Dhabi)

  • Nirupama Kulkarni

    (Centre for Advanced Financial Research and Learning (CAFRAL))

Abstract

Mandating low deposit rates, a form of financial repression, allows banks to raise deposits cheaply and makes investment in government securities profitable but limits credit access. Using regulatory data, we exploit India’s 2011 deregulation of savings deposit rates to show that deposit rates increase after deregulation, more so for banks with low market power; consequently, deposits increase, and deposit maturity contracts. These banks shift from low-yielding government securities to loans, and loan maturity shortens. Credit to households and firms increases. A structural model demonstrates that high-market power banks restrain deposit growth. Deregulation improves financial intermediation, but market power limits gains.

Suggested Citation

  • Yogeshwar Bharat & Subhadeep Halder & Nirupama Kulkarni, 2025. "Financial Repression, Deposit Rate Deregulation, and Bank Market Power," Working Papers 022267, Centre for Advanced Financial Research and Learning (CAFRAL).
    • Handle: RePEc:ris:cafral:022267
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    Keywords

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    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • 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
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East

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