RBI Working Paper No. 14/2020: Asset Quality and Credit Channel of Monetary Policy Transmission in India: Some Evidence from Bank-level Data

Last updated: 18 December 2020

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A new Reserve Bank of India working paper, No. 14/2020, examines the link between the asset quality of Indian scheduled commercial banks and how monetary policy influences credit growth. The study concludes that while India has a strong credit channel for monetary policy, poor bank asset quality weakens its effectiveness. Strengthening banks' capital positions is crucial for monetary policy to have its full impact. The paper also suggests that banking system asset quality issues, economic slowdowns, and slower deposit growth have contributed to credit deceleration since 2013, though accommodative monetary policy has helped mitigate this.

Reserve Bank of India Date : Dec 15, 2020 RBI Working Paper No. 14/2020: Asset Quality and Credit Channel of Monetary Policy Transmission in India: Some Evidence from Bank-level Data Today the Reserve Bank of India placed on its website a Working Paper titled Asset Quality and Credit Channel of Monetary Policy Transmission in India: Some Evidence from Bank-level Data under the Reserve Bank of India Working Paper Series*. The Paper is authored by Janak Raj, Deba Prasad Rath, Pratik Mitra

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FAQ :

The paper assesses the impact of the asset quality of scheduled commercial banks in India on the credit channel of monetary policy transmission.

Yes, the paper finds that a robust credit channel of monetary transmission exists in India.

The effectiveness of monetary policy transmission is impaired by the poor asset quality of banks. A better capital position helps strengthen the transmission.

The credit deceleration since 2013 can be substantially explained by asset quality stress in the banking system, a slowdown in economic activity, and moderation in deposit growth.

The accommodative stance of monetary policy has helped cushion the slowdown in credit growth.

Notification No : 2020-2021/781
Source : https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=50808

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