ISAS Working Papers

Following the collapse of Lehman Brothers in September 2008, the global liquidity crisis affected the Indian financial market adversely. This was largely due to the sudden and large-scale reversals of the foreign institutional investments from the Indian market. However, as the crisis started to spread to the real economy and inflation subdued to some extent, the Reserve Bank of India (RBI) eased policy interest rates sharply and began a process of injecting large-scale liquidity into the financial system. As foreign and non-bank domestic sources of funding dried up, faced with severe refinancing risks, both big corporate houses and small businesses relied heavily on domestic banks as alternative sources of funds. This threatened to put intense pressure on Indian credit markets and brought into the spotlight the ÔÇÿcredit viewÔÇÖ channel of monetary transmission, particularly the bank lending channel