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Increase in credit from banks may not always lead to a rise in investments as largely anticipated, said an RBI working paper.
The analysis shows that in the banking sector, partial monetary policy transmission happens with a lag. Further, banks respond to changes in money market spreads faster and better than changes in policy rate.
The working paper titled Monetary Policy Transmission in India: New Evidence from Firm-Bank Matched Data noted that quick and significant bank loan expansion resulted from a change in term spread.
Citing its analysis, the paper said: We show that in addition to slow or lagged monetary policy transmission, an increase in credit may not always find its way towards increasing investments.