RBIs working paper series on Bank Capital and Monetary Policy Transmission in India

New Delhi: Under the RBI working paper series the Reserve Bank of India placed Working Paper titled “Bank Capital and Monetary Policy Transmission in India” on October 16, 2020. The paper is authored by Silu Muduli and Harendra Behera.

The paper examines the role of bank capital in monetary policy transmission in India during the post-global financial crisis period. Bank capital channel explains how monetary policy can affect bank lending by impacting the overall capital position of a bank. Thus, capital can have an important role in both lending and borrowing behaviour of banks.

Major findings of the paper are:

• Banks with higher capital to risk-weighted assets ratio (CRAR) raise funds at a lower cost.
• Banks with higher CRAR transmit monetary policy impulses smoothly, while stressed assets in the banking sector hinder transmission.
• Recapitalization to raise CRAR can improve transmission; however, CRAR above a certain threshold level may not help as the sensitivity of loan growth to monetary policy rate reduces for banks with CRAR above the threshold.

Monetary policy, thus, can influence credit flows in the economy depending on the capital position of banks.