The impact of macroeconomic variables on the profitability of public and private sector banks in India; A structural equation modeling approach

The Indian banks have strong and sound capital system and the Banking sector reforms in India have opened a new opportunity for the banks operating in public, private and foreign partnership. Due to the changing economic background in the country the banking set-up is also changing. The aim of this research is to analyse the impact of macroeconomic variables determining the profitability of public and private sector banks in India, using a structural equation modeling. Based on the findings of this study, it is concluded that overall, the selected macroeconomic variables are found to have a negligible impact on profitability of public and private sector banks in India. GDP is found to have significant positive effect in all the bank‟s profitability measures. Secondly Inflation, Interest rate and Systematic riskas a mixture, influence significant moderate effect in all bank‟s profit ability measures. Thirdly CNX Bank Index Return has no significant positive effect in all the bank‟s profitability measures. Based on the viability of Structural Equation Modeling (SEM) and statistical significance of important parameter estimates, the profitability of public and private sector banks structure shows the considerably good fit (chi-square minimum/degree of freedom (CMIN/DF)) and the structural model is tolerable.