Relationship Banking and Monetary Policy Transmission: Evidence from India

Though the monetary policy transmission and financial intermediation literature have highlighted the role of the “bank credit channel” and relationship banking, respectively, the effect of relationship banking on the transmission of monetary policy has not been investigated. In this paper, we study the impact of relationship banking on the transmission of monetary policy. Theoretically, relationship banking could ameliorate or exacerbate the effects of monetary policy shocks. Using unique and comprehensive data on bank–borrower relationships in India, we find that firms that enjoy an exclusive banking relationship are less susceptible to monetary policy shocks than firms that bank with multiple banks.