Reserve Bank of India (RBI) paper has said that a rise in credit from banks may not always find its way towards increasing investments as business entities may use credit lines to finance their current liabilities. It also said that banks respond to changes in money market spreads faster and better than changes in policy rates, which are announced by the RBI bi-monthly.
Monetary policy transmission has remained a pivotal topic of interest across all central bankers. Empirically, however, it is hard to disentangle the effects of a policy change on firms' investment demand, banks' credit supply and their interactions. The paper uses a unique ?rm-bank matched dataset from India to provide new insights into the monetary policy transmission mechanism. The findings of the paper indicate that monetary policy transmission works with a lag for bank lending.
For firms, aggregate demand conditions in the market may drive investment demand which may, in turn, be correlated with the monetary policy easing cycle. However, final credit flows from banks depend on the liquidity position of banks that the firms are attached to. These findings indicate the importance of banks' liquidity in addition to the balance sheet channel for improving the efficacy of monetary policy transmission. The central bank said the views expressed in these papers are those of authors and not of the RBI.