The paper estimates a slew of augmented Taylor rule specifications using call and treasury bill rates. After accounting for break points, we calculate the output gap based on a single-index dynamic factor extracted from monthly high-frequency indicators that are representative of broad sectoral activity. In our study, we found that interest rates in India are mostly in line
The credit channel of monetary policy transmission in India is robust, however, its effectiveness is hampered by asset quality of issues of banks, an RBI working paper on “asset quality and credit channel of monetary policy transmission in India” revealed. Hence, for monetary policy actions to have their full impact, banks need to strengthen their capital position and address quality issues. While asset quality issues have an impact on the credit growth of the economy, better capital position of banks can negate the effect. “Controlling asset quality, in the short-run, the credit channel of monetary transmission of public sector banks is stronger relative to that of private sector banks”, the RBI working paper said.
‘Credit channel of monetary policy transmission robust in India’
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The credit channel of monetary policy transmission is robust in India, according to a Reserve Bank of India (RBI) working paper.
“Its efficacy, however, is impaired if there is a deterioration in asset quality but is reinforced by better capital position of banks,” the paper said.
The paper assessed that an increase (decrease) in policy rate by 100 basis points causes the credit to decline (increase) by 1.95 per cent with a lag of six quarters, validating the existence of a robust credit channel of monetary transmission in India.