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Higher bank credit may not always lead to higher investment
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SME Times News Bureau | 06 Jan, 2021
Increase in credit from banks may not always lead to a rise in investments as largely anticipated, said an RBI working paper.
The
analysis shows that in the banking sector, partial monetary policy
transmission happens with a lag. Further, banks respond to changes in
money market spreads faster and better than changes in policy rate.
The
working paper titled 'Monetary Policy Transmission in India: New
Evidence from Firm-Bank Matched Data' noted that quick and significant
bank loan expansion resulted from a change in term spread.
Citing
its analysis, the paper said: "We show that in addition to slow or
lagged monetary policy transmission, an increase in credit may not
always find its way towards increasing investments."
It added that firms may use their credit lines to finance their current liabilities rather than undertaking capital formation.
The
RBI working paper said that in some cases at the firm level,
counter-intuitive results were witnessed due to a change in monetary
policy on the firm's balance sheet.
"This may be because firm's
investment decisions may be correlated with the demand conditions in the
economy, which may in turn be correlated with the monetary policy
cycle. Thus, the effect of monetary policy that we estimate on firms may
not reflect the true effect of the policy itself," it said.
RBI
Working Papers present research work of the central bank's staff
members. The reseach is further disseminated for comments and further
debate.
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