Commercial Banks and Monetary Policy in India

In conducting monetary policy, a Central Bank primarily tries to influence behaviour of the commercial banks. The response of commercial banks to monetary policy actions is, thus a key element of monetary policy. In view of the resurgence of the credit channel of monetary policy and episodes of credit crunch, world-over the issue has gained currency. Against the backdrop of financial sector reforms in India, this book looks into the theory, stylized facts and empirical evidence on the relationship between commercial banks’ behaviour and monetary policy. The book presents an analytical account of the credit channel of monetary transmission and looks into the modified IS-LM model with an independent banking sector. Econometric evidence of the book is pointer to the fact that not all the banks respond uniformly to monetary policy. Attributes like ownership, size, liquidity, or capitalization play important role in determining the nature of response. The book also examines futuristic issues like consolidation of the banking sector in light of the evidence.