Credit shocks could have important policy implications: RBI paper -Governance Now

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

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.”

Read: RBI Working Paper “How Asset Prices Interact with Bank Credit and Monetary Policy? Evidence from Emerging Market and Developing Economies”

Comments

Other News

Major gold smuggling & melting syndicate busted in Mumbai

The Directorate of Revenue Intelligence (DRI) has cracked down on a major gold-smuggling syndicate in Mumbai under `Operation Bullion Blaze`. The operation uncovered an organised racket involved in smuggling gold into India, melting it in covert furnaces, and illicitly selling the refined bullion into the

Those behind Delhi blast will be brought to justice: PM

In his first remarks on the Delhi blast of Monday evening, prime minister Narendra Modi has said that those behind it will be brought to justice. “Our agencies will investigate the conspiracy. The conspirators will not be spared,” he said on Tuesday while delivering his speech in

Proposed: Mandatory ‘Country of Origin’ filter on E-Commerce platforms

The Department of Consumer Affairs of the central government has issued the Draft Legal Metrology (Packaged Commodities) (Second) Amendment Rules, 2025, proposing to make it mandatory for e-commerce platforms to provide searchable and sortable filters based on the `Country of Origin` for packaged commoditi

Experts call for stronger communication of air pollution science

Experts have emphasized the urgent need to improve how scientific evidence on air pollution is communicated to policymakers and the public to spur meaningful health and policy action. They were participating in a webinar titled “Communicating Air Pollution Science for Public Health Act

Maharashtra to partner with Starlink for satellite-based internet

In a step toward inclusive digital transformation, the Maharashtra government has signed a Letter of Intent (LOI) with Starlink Satellite Communications Private Limited. With this, Maharashtra becomes the first Indian state to formally collaborate with Starlink to deploy satellite-based internet services f

Young Birders’ Month: A nationwide celebration inspiring budding nature explorers

This November, children and young people across India are embarking on a joyful exploration of birds and nature as part of Young Birders’ Month (YBM) - a first-of-its-kind, month-long campaign created to spark curiosity and ecological awareness among young minds. This initiative is organized collabor