Corporate Leverage and Monetary Policy Transmission Mechanism in India: A Dynamic Approach

Abstract

The macroeconomic policies of a nation have a major bearing on the financial performance of the companies and their potential sustainability and growth. This study investigates the impact of monetary policy on the corporate leverage adjustment through microscopic monetary policy transmission channels, mainly the interest rate and credit channels, using a sample of 422 manufacturing firms in India from 2011 to 2017 by employing partial adjustment model. The findings suggest that contractionary monetary policy cuts down overall corporate debt. The study further asserts that corporate debt in Indian firms demonstrates target behaviour and the speed at which firms adjust their actual debt ratios towards target debt ratios is a function of not only firm-specific characteristics but also macroeconomic conditions prevailing in the country, proxied by monetary policy indicators in our study. The study has critical policy implications as the balance sheet situation of corporates is a crucial factor in the financial stability of the economy.