Monetary Policy and the Credit Channel: Evidence from India

Credit channel of monetary transmission mechanism provides an alternative transmission channel of monetary shock through the asset side of the banking system. Based on the literature on market imperfection, it presents some appealing arguments on supply side effects of innovations in monetary policy, which are of relevance to developing countries. We test the empirical validity of credit channel in India in the context of the mid-nineties episode of the adverse monetary shock. The evidence suggests the operation of a balancesheet channel with the effect of an adverse monetary shock falling disproportionately on bank-dependent firms. The evidence in respect to an aggregate lending channel is mixed.