Exploring the Policy Reforms and Productivity Nexus: Evidence from Indian Banking Sector

Abstract

The study investigates the effect of deregulation of the Indian financial system in 1991 followed by various financial sector reforms on productivity growth of Indian scheduled commercial banks, with exclusion of Regional Rural Banks, over the period of time, from 2002 to 2010.The results of our study show that the performance of the Indian banking industry remained satisfactory for the said period despite of the financial turmoil that literally hampered the financial institutions all over the world. This was because Indian financial system remained sheltered from such external shocks as a result of having flexible exchange rate regime, the foreign reserves were high, the capital account is not yet fully convertible, and banks and their customers have limited foreign exchange exposure. Therefore, we recommend that the policy makers should carry on with their current economic policy as it has been successful in sheltering them from external shocks. Furthermore, the study found that the deposits and credits are negatively related with financial system reforms of deregulation, which is surprising. As increase in deposits results in increase in credits. So, we would recommend the policy makers to emphasize on increasing the deposit base of the banks by increasing the interest rates on deposits.

Keywords: Financial Sector Reforms, Indian Banking industry, Productivity, Financial turmoil, Deregulation