RBI says monetary policy transmission has improved

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Published: April 10, 2020 4:10:33 AM

RBI has cited introduction of external benchmark rates for new loans and lagged impact of the previous rate cuts as the reason for improvement in monetary policy transmission.

Taking into account the 13 months period from February 2019, RBI said major pass-through of the policy rate cut occurred between October 2019 and February 2020. Taking into account the 13 months period from February 2019, RBI said major pass-through of the policy rate cut occurred between October 2019 and February 2020.

The transmission of rates to term deposits and lending rates has improved, particularly after October 2019, the Reserve Bank of India (RBI) said in its monetary policy report released on Thursday.

RBI has cited introduction of external benchmark rates for new loans and lagged impact of the previous rate cuts as the reason for improvement in monetary policy transmission.

Taking into account the 13 months period from February 2019, RBI said major pass-through of the policy rate cut occurred between October 2019 and February 2020. Of the total 46-basis point (bps) reduction in weighted average domestic term deposit rate (WADTDR) , 39 bps reduction happened between October 2019 and February 2020.

Similarly, weighted average lending rate (WALR) on outstanding rupee loans declined by 18 bps since October 2019 in contrast to a rise of 2 bps during February-September 2019. The WALR on ‘fresh’ rupee loans declined by 71 bps in 13 months from February 2019. Of this, a decline of 31 bps occurred during October 2019-February 2020.

RBI also observed that foreign banks have reduced lending rates more in comparison with public sector and private sector banks. The weighted average lending rate of foreign banks came down by 121 bps between February 2019 and February 2020. However, the weighted average lending rate of PSBs came down by 83 bps and that of private banks by 42 bps during the same period, according to RBI. Overall, the weighted average lending rate of the banks came down by 71 bps from February 2019 to February 2020.

In its monthly bulletin released in March, RBI had said there were early indications of an improvement in transmission to bank loans sanctioned in the retail and small and medium enterprises (SME) segments, where new floating rate loans have been linked to external benchmarks.

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