Does CRR and Repo Change Affect Corporate Output?

Abstract

Bank financing is an imperative component of financing the companies. When banks are short on liquidity, this financing activity also tends to go slow. Banks liquidity is dependent upon the policy enforced by the central bank which uses cash reserve ratio (CRR) and Repo rates very frequently to this effect. Since bank credit is dependent on its liquidity position, any change in key policy rates will affect the corporate funding. This is the basic hypothesis which is being tested in this research. The objective of the article is to understand the effect of two important policy rates, Repo and CRR, on corporate output through aggregate sales of the listed companies. The objective was achieved by building a VAR system and doing the required analysis using quarterly data for the time period 2000–2015. One of the important findings was that lag effect is very critical to understand this relationship between policy rates and corporate output and while formulating policies, this should be an important variable to be considered.