IMPACT OF CHANGES IN RBI POLICIES ON TRADING AND INVESTMENTS OF COMMERCIAL BANKS IN INDIA

Paper Number :WP21/2022
Publication Date :July 6, 2022

Investments in various segments of/instruments available in the financial market made by the commercial banks play a very crucial role not only in achieving the return target of banks and managing their liquidity but also in the overall growth and development of the financial market in bank driven and emerging economies like in India. Besides changes in policy rates, changes in prudential norms and guidelines related to the classification and valuation of investments, reserve requirements, liquidity and risk management, etc., released by the Reserve Bank of India from time to time, are expected to have a significant impact on the pattern and magnitude of banks’ investments in various channels, and thereby affect the financial market and the financial system of the country.

In this Policy Research Note, efforts are made to understand the possible implication of a few relevant policy changes (actual and proposed since January 2022) on the investments made by commercial banks in India, and on the overall financial market. Changes in various policy rates and reserve ratios announced since April 2022 are found to have a significant impact on bond yields and therefore on trading and investments undertaken by the commercial banks in India. Changes (Actual and Proposed) in the prudential norms for classification and valuation of investments by commercial banks may also affect the nature of their trading and investment activity, which will have further implications for the overall growth of the Indian financial market.