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Monetary policy transmission of PSU banks stronger than private lenders: RBI paper

The monetary policy transmission of state-owned banks in the short-run is stronger than their counterparts in the private sector, and can be improved further with capital infusion, said a RBI working paper. The credit channel of monetary policy transmission is robust in India and its efficacy can be reinforced by better capital position of banks, said the working paper on ‘Asset Quality and Credit Channel of Monetary Policy Transmission in India: Some Evidence from Bank-level Data’. “Controlling for asset quality, in the short-run, the credit channel of monetary transmission of public sector banks is stronger relative to that of private sector banks,” it said. According to the paper, credit deceleration in India since 2013, in part, could be attributed to a gradual worsening of asset quality. Other factors contributing to the slowdown of credit growth include a slowdown in economic activity and deposits. “However, the accommodative stance of monetary policy and reduction in the policy repo rate (starting from 2019) helped cushion the credit deceleration,”it said, adding that in the absence of a sharp cut in the policy repo rate, the slowdown in credit growth would have been far more severe.

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