Bank capital channel of monetary policy: panel data evidence for India

The paper explores the first leg of monetary policy transmission via bank capital channel by studying the impact of monetary policy on equity capital of banks. Using a panel data of 26 banks for the period 2004–05 to 2019–20, it is observed that monetary policy has a significant impact on the equity capital of banks through its effect on interest margins. An expansionary monetary policy is found to increase the profitability of Indian banks which expands their stock of equity capital enabling banks to increase their supply of credit. This has positive implications for investment, consumption, and aggregate output in the economy. Overall, the analysis suggests that bank capital is an important channel in exploring the monetary policy transmission in India.