A recent research article by economists at the Reserve Bank of India has highlighted a structural feature of monetary policy transmission that is rarely discussed in policy discourse. Using firm-level data from 779 listed Indian manufacturing companies spanning two decades, the study finds compelling evidence that monetary policy has asymmetric effects across firms, primarily depending on the strength of their balance sheets.Specifically, the so-called balance sheet channel plays a decisive role in determining whether and how firms invest following changes in interest rates. During periods of tight monetary policy, small and financially constrained firms tend to rely more heavily on internal cash flows to fund their investments, owing to reduced access to external financing. This sensitivity is far less pronounced among larger, more established companies.
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