Relationship Banking and Monetary Policy Transmission: Evidence from India

49 Pages Posted: 17 Nov 2015 Last revised: 21 Aug 2017

See all articles by Abhishek Bhardwaj

Abhishek Bhardwaj

Indian School of Business

Krishnamurthy Subramanian

Indian School of Business (ISB), Hyderabad

Prasanna L. Tantri

Indian School of Business

Date Written: November 16, 2015

Abstract

Though the monetary policy transmission and financial intermediation literatures have respectively highlighted the role of the “bank credit channel” and relationship banking, the effect of relationship banking on the transmission of monitory policy has not been investigated. In this paper, we study the impact of relationship banking on the transmission of monitory policy. Theoretically, relationship banking could ameliorate or exacerbate the effects of monetary policy shocks. Using a sample of bank dependent firms in India, we find that firms that enjoy an exclusive banking relationship are less susceptible to monetary policy shocks than firms that engage in transactional banking. The effects are symmetric across monetary policy tightening and loosening. We conjecture that reduced information asymmetry due to relationship banking blunts the impact of “firm balance sheet channel” of monitory policy transmission.

Keywords: banks, monetary policy, central banks and their policies

JEL Classification: G21, E52, E58

Suggested Citation

Bhardwaj, Abhishek and Subramanian, Krishnamurthy and Tantri, Prasanna L., Relationship Banking and Monetary Policy Transmission: Evidence from India (November 16, 2015). Indian School of Business WP 2691556, Available at SSRN: https://ssrn.com/abstract=2691556 or http://dx.doi.org/10.2139/ssrn.2691556

Abhishek Bhardwaj (Contact Author)

Indian School of Business ( email )

Hyderabad, Gachibowli 500 019
India

Krishnamurthy Subramanian

Indian School of Business (ISB), Hyderabad ( email )

Hyderabad, Gachibowli 500 019
India

Prasanna L. Tantri

Indian School of Business ( email )

Hyderabad, Gachibowli 500 032
India
9160099959 (Phone)

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