Macroeconomic Stress Testing And The Resilience Of The Indian Banking System: A Focus On Credit Risk
The paper undertakes a macroprudential analysis of the credit risk of Public Sector Banks during the liberalization period. Using the Vector AutoRegression methodology, the paper investigates the dynamic impact of changes in the macroeconomic variables on the default rate, the Financial Stability Indicator of banks by simulating interactions among all the variables included in the model. Feedback effects from the banking sector to the real economy are also estimated. The impact of variations in different Monetary Policy Instruments such as Bank Rate, Repo Rate and Reverse Repo Rate on the asset quality of banks is examined using three alternative baseline models.