RATE TRANSMISSION MUCH BETTER NOW, SHOWS RBI DATA

The RBI has lowered the policy repo rate by 250 basis points (bps) since February 2019. The rate-easing cycle started much before the pandemic set in as growth had started showing signs of weakening.

Poor transmission of policy actions has been a long-standing issue in India’s financial market. The central bank experimented with several models to improve the transmission, and seems to have got it right this time. In response to each policy rate cut by the central bank, the bond market passed on the cuts almost immediately. Banks also lowered their rates, but not in the same quantum as the bond market.

One of the reasons was linking the lending rates to an external benchmark, such as a money market rate.

In response to the cumulative reduction of policy repo rate by 250 basis points, the 1-year median marginal cost of funds-based lending rate (MCLR) of banks declined by 155 bps during February 2019 to June 2021.

“Transmission has improved considerably in the current easing phase (up to May) and more so since October 2019,” said the RBI in an article on its June bulletin.