Abstract
This paper uses newly collected data from the Reserve Bank of India to examine the effects of various types of banking sector controls on the process of financial deepening. With the exception of a lending rate ceiling, these controls are found to influence financial deepening negatively, independently of the well known effect of the real interest rate. Exogeneity tests suggest that financial deepening and economic growth are jointly determined. Thus, policies which affect financial deepening may also have an influence on economic growth. The role of banking sector controls in the process of economic development has received considerable attention in the literature. The traditional approach, due to McKinnon (I973) and Shaw (I973), postulates that government intervention in the pricing and allocation of loanable funds, dubbed 'financial repression', inhibits financial development by depressing real interest rates (see
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