Working Papers

The Transmission of Monetary Policy Within Banks: Evidence from India

Abstract. India’s central bank frequently injects liquidity into banks or drains liquidity by altering the cash balances that banks must maintain with it. We analyze the lending responses within banks to these quantitative tools of monetary policy. We use internal data from over 125,000 branches of banks, and estimate empirical specifications that control for time-varying unobserved heterogeneity in banks and geographies. We show that the within-bank variation in lending is economically significant, and is explained by a rich suite of branch asset, liability, and organizational variables. Branches that are larger, make loans with smaller ticket size, are deposit rich, make shorter term loans, have fewer non-performing assets, and greater managerial capacity respond more to monetary policy. Responses are more sluggish in state-owned banks. Thus, besides the external financing frictions faced by banks, internal frictions within banks significantly explain the lending responses to funding shocks.