Impact of Monetary Policy on the Profitability of Commercial Banks in India

The study is conducted with a view to quantify the impact of various instruments of monetary policy on the profitability of commercial banks during the period 1960-84. The task has been accomplished with the help of step-wise multiple regression analysis. Further Beta co-efficients have been calculated to compare the relative impact of various policy measures. The reserve requirement raatio (cash reserve ratio and statutory liquidity ratio) has been found to be the most significant instrument of credit control having a negative impact on the banks' profitability. Although priority sector financing also had a negative impact but its magnitude was much less as compared to reserve ratio. The study makes a case for reducing the reserve requirement ratio to increase the diversion of funds towards industries which had a significantly positive impact on banks' profitability.