1Brunel University, UK.
2ICRA Limited.
The authors would like to thank Ali Kutan for helpful discussions about the relevant literature and some of the results. They remain responsible for all remaining errors.
The observed amount of credit disbursed in an economy depends on the willingness of banks to lend and on the willingness of companies and individuals to borrow. Recent literature examining the impact of monetary policy on the real sector of the economy has focused on a ‘bank lending channel’, which emphasises the mechanism through which central bank actions impact the volume of credit disbursal. In the presence of alternatives to bank credit to finance business operations, the transmission mechanism of a monetary policy stance may not be obvious. This paper looks into the sensitivity of the volume of bank credit to the changes in interest rate levels taking disaggregated firm-level data for more than 4,000 Indian listed companies over an eight-year period. Our results find support in favour of the bank-lending channel for monetary policy in India whereby an increase in the level of interest rates reduces both the overall debt and the ratio of bank debt to total debt of an average Indian company in our sample.
