Policy Interest Rate and Bank Profitability-Scheduled Commercial Banks in India

Abstract

The main aim of this research study is to inspect the relationship between interest rate (monetary policy) and bank profitability, along with some bank specific, industry specific, and macroeconomic variables. The research methodology includes balanced panel data comprising 50 Indian scheduled commercial banks for 12 years from 2008 to 2020. Fixed effect and random effect model regression have been used to know the required relationship. Due to the presence of heteroskedasticity, the results for robust standard error have been presented. The result shows a positive association between the interest rate spread and two banks’ profitability indicator return on assets (ROA), return on equity (ROE) while interest rate has an insignificant negative relationship on bank profitability. The study concludes that the central bank can increase or decrease the interest spread to maintain the surplus or deficit liquidity problem in the economy. Banks are advised to make the appropriate change in lending rate or deposit rate with respect to policy rate to make transmission channel efficient. Also, identify some other factors that affect the bank’s profitability. It will help the bank manager to improve the bank’s profitability.