Credit shocks could have important policy implications: RBI paper

While bank credit shocks are more dominant in influencing real house prices, it is the monetary policy shock which primarily causes variations in real stock prices

GN Bureau | January 11, 2017


#monetary policy   #Reserve Bank of India   #bank credit   #RBI   #stock market  
Reserve Bank of India
Reserve Bank of India

House and equity prices respond at varying speeds and significantly varying magnitude to monetary policy shocks, signifying that it may turn out to be challenging for policy makers to simultaneously stabilise both, said a Reserve Bank of India working paper on Wednesday.
The working paper, authored by Bhupal Singh and Avadhoot R Nadkarni, said that aggregate demand shocks are found to be more dominant in causing fluctuations in asset prices as compared with credit shocks, thus highlighting the role of economic cycles in accentuating asset price rise.
 
A credit shock occurs when there is a swift reduction in the availability of loans (credit) or a sharp increase in the costs of getting new loans from banks.
 
“As EMDEs (emerging market and developing economies) reach higher level of financial deepening, linkages between interest rate, credit, stock and house prices may turn stronger and the assessment of their effects may assume greater importance.”
 
The findings could have important policy implications for an EMDE like India. The limited role of credit shocks in causing stock price movements could be true for India given the regulatory norms for banks’ exposure to capital markets, it added.
 
The paper said that the principal shocks that influence movements in asset prices are real output (aggregate demand), bank credit and monetary policy shocks. Real output shock, capturing mainly the aggregate demand shock, leads to significant increase in real credit growth, which persists for eight quarters after the initial shock. 
 
Simultaneously, there is significant increase in both house and stock prices - the impact on stock prices appear to be much more pronounced and durable as compared with the impact on house prices.
 
It said that real bank credit shock leads to significant increase in real output and a short run decline in inflation. Both real stock and house prices rise in response to an expansionary credit shock but the impact is significant and persistence only in the case of house prices. The phenomena of lack of significant impact on stock prices could be inter-alia attributed to various regulatory restrictions imposed on sectoral credit flow to stock markets.
 
“Against the backdrop of our central hypothesis that credit shocks rather than interest rate shocks play important role in causing movements in asset prices, empirical results suggest that while bank credit shocks are more dominant in influencing real house prices, it is the monetary policy shock which primarily causes variations in real stock prices.”
 
 
 


 

Comments

 

Other News

BDL secures export order of $14.33 million

Bharat Dynamics Limited (BDL) has achieved 65 percent of its export target for 2018-19 FY after it bagged an export order worth $14.33 million for export of light weight torpedoes to a friendly country. BDL has a dedicated unit at Visakhapatnam exclusively for manufacture of underwater weapo

BEML joins hands with L&T to cater to Indian defence market’s needs

Defence PSU, BEML Ltd and Larsen & Toubro (L&T) have signed an agreement to jointly capitalise on the emerging opportunities in the domestic and export markets for defence products and systems. The cooperation between the two entities is aimed to leverage on Make in India initiative

NTPC signs term loan agreement of Rs 1500 crore with HDFC Bank

NTPC has signed term loan agreement for Rs 1500 crore with HDFC Bank Limited on July 10 to utilise to part finance the capital expenditure of the power corporation. The loan facility is extended at an interest rate linked to three months MCLR of the bank. The loan has a door to door tenure o

Rahul’s messianic words don’t match dirty deeds of politics

Self-deception is an essential trait of a revolutionary, particularly of the Marxist variety. Rahul Gandhi as the Congress president seems too eager to internalise this trait in his politics. If you have any doubt, look at his latest tweet which is divinely prophetic in its content.

When two plus two need not be four

The recent victory of the opposition in the Uttar Pradesh by-elections after their complete decimation in the 2014 general elections and the 2017 assembly elections has been interpreted differently by different takers. Some saw it as a resurgence of the opposition on the back of an alliance. This led to&nb

The rhythms of a protest

On June 29, I was able to grab Carnatic singer TM Krishna for a few minutes on the sidelines of the launch of ‘Kodaikanal Still Won’t’, a music video calling out Unilever’s double standards in cleaning up its mercury contaminated factory site at, well you guessed it, Kodaikanal. The

Current Issue

Current Issue

Video

CM Nitish’s convoy attacked in Buxar

Opinion

Facebook    Twitter    Google Plus    Linkedin    Subscribe Newsletter

Twitter