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Commercial Banks and Monetary Policy in India   
Commercial Banks and Monetary Policy in India
Partha Ray
Hard Bound Book (6" x 9¼") :   Pages : 280
2008  Edition   :   ISBN 13: 978-81-7188-635-7
Price : Rs. 795.00 ; US$ 59.95
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Reviews / opinions:

  “(T)he study of monetary policy transmission needs continued attention and I hope that others will follow Partha Ray’s example of careful empirical investigation for enhancing our understanding of these issues.” Rakesh Mohan, Deputy Governor, Reserve Bank of India, Mumbai.

“Partha Ray’s is a careful study of an important aspect of the monetary transmission mechanism through the credit channel. Of particular interest to economists and policy makers would be his analysis of the way ownership, size and liquidity of balance sheet of banks affect their response to the Reserve Bank’s policy intervention.” Mihir Rakshit, Director, Monetary Research Project, ICRA Limited, Kolkata.

"Dr. Partha Ray, in this book, has attempted to place the entire gamut of issues bearing on monetary policy in a theoretical cum institutional perspective. Modern macroeconometric models are brought to bear upon important aspects of monetary policy in the Indian context. Readers will find much that is valuable in this book, which may be regarded as a welcome addition to the rather limited literature on this subject in the Indian context.” Dilip Nachane, Director, Indira Gandhi Institute of Development Research, Mumbai.

"This book offers the first systematic discussion of the central bank impacts on commercial bank behaviour in India. It is a must have for anyone interested in the effectiveness of monetary policy through the Indian banking system. The thoroughly researched theoretical and empirical chapters are well written and provide valuable insights on this subject at the aggregated as well as disaggregated level." Gabe de Bondt, Principal Economist, Capital Markets and Financial Structure Division, European Central Bank, Frankfurt.

"In traditional macroeconomics monetary policy was something of a black box. The central bank was supreme in the financial world. But with the recent evolution of ideas and reality we recognize this to be a convenient fiction. With the intrusion of game theory into every branch of the discipline of economics we now see banks as active agents working to neutralise the actions of central banks that would erode their bottom lines. With the financial sector reforms in India and the consequent growing power of our commercial banks this is a real possibility. Partha Ray investigates the very question … This book strikes a fine balance between cutting-edge economic theory, best-practice econometric methodology and clear-sighted knowledge of the Indian economy." Pulapre Balakrishnan, Senior Fellow, Nehru Memorial Museum and Library, New Delhi; Ex Professor of Economics, Indian Institute of Management, Kozhikode.

"Dr. Ray masterfully demystifies the often discordant responses of commercial banks to policy actions of central banks in emerging economies, such as India. This book will turn out to be a high-value addition to one's portfolio of readings on monetary policy." Sudesh Mujumdar, Associate Professor of Economics, University of Southern Indiana, USA.

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, stylised 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 capitalisation play important roles in determining the nature of response. The book also examines futuristic issues like consolidation of the banking sector in light of the evidence.

  About the AUTHOR:    

Partha Ray is currently Adviser to the Executive Director (India, Bangladesh, Sri Lanka and Bhutan) at the International Monetary Fund, Washington D.C. For more than a decade he, as an economist at the Department of Economic Analysis and Policy, Reserve Bank of India, has been involved with applied economic research with policy content. He also has been associated with a number of official committees on policy matters. Educated in Kolkata, Mumbai and Oxford, he has published extensively on issues related to banking and monetary policy in professional journals in India and abroad. He taught economics to undergraduate students in RBC College, University of Kolkata during 1987-89.



  1. Introduction and Overview
    1.1 Banks and Monetary Policy
    1.2 Indian Context
    1.3 Issues
    1.4 Methodology
    1.5 Broad Findings

  2. Commercial Banks and Monetary Policy: Some Theoretical Considerations
    2.1 Introduction
    2.2 The Ability of Central Banks to Constrain Bank Lending
    2.3 Extended IS-LM Models with Explicit Role for Banks
        2.3.1 Extended IS-LM Models without an Independent Role of Banks
        2.3.2 Banks in Bernanke and Blinder (1988) Model
    2.4 Loan and Deposits Substitutes for Banks and Corporates
        2.4.1 Certificates of Deposit and Bank Behaviour
        2.4.2 Existence of Bank-Dependent Borrowers and Commercial Paper
    2.5 Information Asymmetry and Bank Behaviour
        2.5.1 Stein (1998)’s Model
        2.5.2 Macro-Implications of Credit and Equity Rationing
    2.6 Concluding Observations

  3. Monetary Policy and Bank Behaviour in India: Some Stylised Facts
    3.1 Introduction
    3.2 Macroeconomic and Monetary Trends
    3.3 Monetary Policy Actions
         3.3.1 Direct Measures for Controlling Banks’ Balance Sheets
         3.3.2 Development of Market-related Instruments
         3.3.3 Deregulation of Interest Rates
         3.3.4 Deregulation of Bank Operations
         3.3.5 Prudential Regulation
         3.3.6 Changing Fiscal Scenario
    3.4 Commercial Bank Behaviour
         3.4.1 Aggregative Parameters
         3.4.2 Portfolio Composition of Commercial Banks
         3.4.3 Profitability Indicators
    3.5 Concluding Observations

  4. Impact of Monetary Policy on Banks’ Balance Sheet: The Macro Behaviour
    4.1 Introduction
    4.2 Monetary Policy and Bank Portfolio: A Select Review
         4.2.1 Methodology of Measuring the Impact
         4.2.2 Monetary VAR Models: A Review
         4.2.3 Monetary Policy and Bank Portfolios
    4.3 Specification of the VAR and the Variables
         4.3.1 VAR Specification
         4.3.2 Choice of Variables and Time Span
         4.3.3 Treatment of Seasonality
    4.4 Results from the Basic Model
         4.4.1 Selection of Lag Length
         4.4.2 Impulse Responses
         4.4.3 Variance Decomposition
    4.5 Some Robustness Tests
         4.5.1 How Far are the above Results Sensitive to Ordering?
         4.5.2 Unrestricted Difference VAR
         4.5.3 Results with Alterative Choice of Policy Variable
         4.5.4 Results in a Five Variable VAR
         4.5.5 Results with Quarterly GDP
         4.5.6 Results with Interest Rate as an Additional Variable
    4.6 Conclusion

  5. The Impact of Monetary Policy: Does Ownership Matter?
    5.1 Introduction
    5.2 Heterogeneity in Impact of Monetary Policy on Banks: A Select Review of Literature
         5.2.1 Ownership and Monetary Policy Impact on Banks
         5.2.2 Indian Literature on Ownership of Banks
    5.3 Some Stylised Facts
         5.3.1 Public Sector Banks
         5.3.2 Foreign Banks
         5.3.3 Private Sector Banks
         5.3.4 Old Generation Private Sector Banks
         5.3.5 New Generation Private Sector Banks
         5.3.6 Relative Shares of the Bank Groups
         5.3.7 Performance Indicators of the Bank Groups
         5.3.8 Portfolio Pattern
    5.4 Impact of Monetary Shock on Different Types of Banks
         5.4.1 Methodology and Data Base
         5.4.2 Impulses from the Level VARs
         5.4.3 Variance Decomposition
    5.5 How Robust are these Results?
         5.5.1 Sensitiveness of the VARs with respect to Ordering
         5.5.2 Impulses from the Difference VAR
         5.5.3 Results with Alternative Monetary Stance Variables
         5.5.4 Results for a Shorter Time Period (1996-97 through 2003-04)
         5.5.5 Results from a Five Variable VAR
    5.6 Conclusion

  6. Size, Liquidity and Capital: How do they Influence Bank Credit?
    6.1 Introduction
    6.2 Received Literature
         6.2.1 Size, Liquidity and Bank Credit
         6.2.2 Capital Constraint and Bank Behaviour
         6.2.3 Indian Evidence
    6.3 A Description of the Panel and Some Stylised Facts
         6.3.1 A Description of the Panel
         6.3.2 Some Stylised Facts
    6.4 Empirical Methodology and the Model
         6.4.1 Empirical Methodology
         6.4.2 The Model
    6.5 Empirical Results
         6.5.1 Base-line Model
         6.5.2 Results from Specific Attributes of Size, Liquidity and Capitalisation
    6.6 Some Robustness Tests
         6.6.1 Results with Alternative Liquidity Variable
         6.6.2 Results with Alternative Stance Variable
         6.6.3 Results with Normalised Variables
         6.6.4 Results with Interest Rates
    6.7 Conclusion

  7. Conclusion and the Way Forward
    7.1 An Overview
    7.2 Broad Contours
         7.2.1 Theoretical Developments
         7.2.2 Stylised Facts for India
         7.2.3 Econometric Evidence
    7.3 Policy Implications and Futuristic Scenario
         7.3.1 Consolidation in Indian Banking
         7.3.2 Changes in Operating Procedure of Monetary Policy
         7.3.3 Newer Norms of Bank Capital
    7.4 Scope of Further Research

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