Monetary Policy Transmission Fastest For Past Three Cycles: RBI
Banks have been the quickest to pass on higher interest rates effected in the last three rate increase cycles, according to data from the Reserve Bank of India (RBI). This is mainly due to the regulator mandating the linking of lending rates to external benchmarks, .
The central bank has stated in its latest Financial Stability Report that Monetary policy transmission to bank lending and deposit rates has been stronger in this cycle compared to previous cycles.
According to recent data, during the period between May 2022 and February 2023, the transmission to outstanding lending rates was 112 basis points(bps), which is equivalent to 45 per cent of the total tightening of 250 bps.
This is a significant improvement compared to the previous two tightening cycles of July 2013 to December 2014 and June 2018 to January 2019, where data showed negligible transmission to outstanding lending rates.
Furthermore, the transmission to outstanding deposit rates in the latest cycle is faster than the previous cycles. The transmission rate in the latest cycle is 69 per cent or 172 bps, compared to a transmission rate of 20 bps or 40 per cent in the 2018 to 2019 cycle and a negative transmission rate in the 2013 to 2014 cycle. It's worth noting that transmission has been higher on term deposits, as savings rates still tend to be rigid.
The RBI has observed that the distribution of outstanding loans across interest rate brackets indicates faster transmission. The percentage of total outstanding loans in the interest rate range of more than 9 per cent increased from 30.7 per cent in March 2022 to 57.8 per cent in September 2023. Meanwhile, outstanding loans with interest rates less than 9 per cent decreased from 69.3 per cent to 42.2 per cent.
One of the reasons for this faster transmission of rates is that the RBI has mandated banks to use external benchmarks to price their loans. Most banks have linked their pricing to the repo rate. As a result, they have to reprice loans immediately after the central bank signals a change in the repo rate.
The Reserve Bank has stated in its latest monetary policy report that the use of external benchmark-based lending rate (EBLR) linked loans with shorter reset periods has increased, which has aided the transmission to weighted average lending rate (WALR) on the outstanding loans of scheduled commercial banks. At the end of September 2023, the share of linked loans in total outstanding floating rate rupee loans of commercial banks was 53.3 per cent, while that of MCLR linked loans was 41.9 per cent.
