Excess cash or excess headache? Demonetisation and bank behaviour in India

What is it about?

Sudden and unannounced policy changes by the government can have significant consequences for commercial bank behaviour. Using data on Indian commercial banks during 2010-2020, we examine the impact of such an announcement – the 2016 demonetisation episode- on returns and risk. The findings reveal a decline in risk and an increase in returns of state-owned banks consistent with a flight-to-safety. The response differed in terms of market- and accounting measures and across state-owned banks with differing levels of capital and asset quality. Robustness checks lend credence to these findings.

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