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Top1. Introduction
The central bank, together with fiscal authorities, affects real economy growth through the monetary policy transmission mechanism (Taylor 1995), which describes the process through which monetary policy decisions effect economic growth and inflation. Monetary policy decisions affect asset values and the economy via the monetary transmission mechanism (Aksoy & Basso, 2014). The Patel Committee Report to the Reserve Bank of India (RBI) detailed a roadmap toward a more robust monetary policy framework, building on the foundation laid in the mid-1990s. The success of monetary policy is measured by how quickly and significantly it fulfils its goals. However, there is debate about the policy's impact mechanism.
By establishing the policy rate and establishing the terms under which borrowed and unborrowed reserves are made available to the banking system, the Reserve Bank of India (RBI) exerts a hegemonic influence over the operating procedure. It is this provision that forces a bank to resort to the money market in order to satisfy its short-term funding needs. That is why money markets are pegged to policy rates: they provide stability. When funds are tight, banks can borrow money daily at overnight rates or issue certificates of deposit; whatever method provides the lowest interest rate is chosen. Because of this kind of discretionary arbitrage by banks, the money market is highly dependent on the direction of the Reserve Bank of India's (RBI) policies toward policy target variables (Kuttner, 2001). To measure the magnitude of monetary shocks, these market instruments attempt to predict the path of future monetary policy. In order to put a number on policy shocks, it is necessary to use a proxy for policy expectations, such as the weighted average of call money rates. Considering the foregoing, it is crucial to study the impact of bank capital on the transmission of monetary policy in India. Recent research suggests that the state of the banking industry and the actions of its participants impact the growth and inflationary outcomes of monetary policy (Gambacorta and Shin 2018; Markovic 2006; Van den Heuvel 2002; Muduli, S., and Behera, H.) (2021). Several authors have presented convincing explanations for the magnitude, timeliness, and distributional effects of policy on an economy via bank credit lending channels: Bernanke and Blinder (1992), Kayshap and Stein (1995), deBondt (1999), Favero et al. (1999), and Kishan and Opiela (2000). They show how bank loans facilitate the spread of monetary policy. The United States' unstable banking sector and the role of banks as a possible source of friction in the transmission mechanism of monetary policy were again highlighted during the 2007–2010 financial crisis.
The following is the organisation of the paper: Section 2 is a review of the literature, Section 3 is a data source and empirical analysis with discussion, Section 4 is the conclusion, and Section 5 is the practical implications and recommended policies.