Monetary Transmission is working somewhat

In previous post, we looked at How is India financing its growth?

Carrying forward from there I was looking at the financial markets chapter. There are deposit and lending rates of banks. Looking at this data it tells us about monetary transmission. If bank rates are moving in line with policy rates, we can say monetary transmission is working. After all it is banks through which this transmission mechanism works.

In this crisis, monetary transmission suffered worldwide. First even though central banks cut-rate sharply, same was not seen in the case of banks. In advanced economies lending still remains weak.

In India, as RBI cut rates banks did not cut rates as much. To this RBI Governor said:

The efficacy of the monetary transmission mechanism hinges on the extent and speed with which changes in the central bank’s policy rate are transmitted through the term structure of interest rates across markets. While the transmission of policy rate changes by the Reserve Bank has been faster in the money and government securities markets, it has been slow to the banks’ lending rates. This has been a cause for concern. As indicated in the Annual Policy Statement, some of the major factors that impede the transmission of policy rates to the banks’ lending rates are:

(i) the administered interest rate structure on small savings, which constrains the reduction in deposit rates;

(ii) a substantial portion of bank deposits is mobilised at fixed interest rates, which discourages banks to reduce their lending rates in line with the policy rates;

(iii) concessional lending rates linked to BPLRs for some sectors, which make overall lending rates less flexible; and

(iv) persistence of the large market borrowing programme of the government, which hardens interest rate expectations. As liquidity remains ample, the competitive pressure on lending rates has increased. Consequently, the transmission of policy rate changes to bank lending rates has improved since the last Annual Policy Statement in April 2009. As the short-term deposits contracted earlier at high rates mature and get repriced, it opens up room for banks to further reduce their lending rates.

Now as RBI as been hiking rates since Mar-10, what do we see in deposit and lending rates? Well they did not change till Jun-10 but have edged up slightly in Oct-10. Banks have increased deposit rates to mobilize higher time deposits.

Deposit Rates of Banks (in %)
  Sep-09 Dec-09 Mar-10 Jun-10 Oct-10
Public Sector Banks           
Up to 1 year 1.00-7.00 1.00-6.25 1.00-6.50 1.00-6.25 1.00-7.00
> 1year-3 years 6.50-8.00 6.00-7.25 6.00-7.25 6.00-7.25 7.00-7.75
> 3 years 7.00-8.50 6.25-7.75 6.50-7.75 6.50-7.75 7.00-8.00
Private Sector Banks           
Up to 1 year 2.00-7.50 2.00-6.75 2.00-6.50 2.00-6.50 2.50-7.25
> 1year-3 years 6.00-8.75 5.25-7.50 5.25-7.75 6.25-7.50 6.50-8.25
> 3 years 6.00-9.00 5.75-8.00 5.75-8.00 6.50-8.00 6.50-9.00
Foreign Banks           
Up to 1 year 1.80-8.00 1.25-7.00 1.25-7.00 1.25-7.00 1.25-7.30
> 1year-3 years 2.25-8.50 2.25-7.75 2.25-8.00 3.00-8.00 3.00-8.00
> 3 years 2.25-9.50 2.25-8.50 2.25-8.75 3.00-8.50 3.00-8.25


Lending Rates of Banks  (in %)
 BPLR/Base Rate Sep-09 Dec-09 Mar-10 Jun-10 Oct-10
1. Public Sector Banks 11.00-13.50 11.00-13.50 11.00-13.50 11.00-13.50 7.50-8.50#
2. Private Sector Banks 12.50-16.75 12.50-16.75 12.50-16.75 12.50-16.75 7.00-9.00#
3. Foreign Banks 10.50-16.00 10.50-16.00 10.50-16.00 10.50-16.00 5.50-9.00#
Actual Lending Rate*          
1. Public Sector Banks 3.50-17.50 3.25-18.00 3.25-18.00 3.25-18.00
2. Private Sector Banks 4.10-26.00 3.50-25.84 3.00-28.00 2.80-26.00
3. Foreign Banks 2.76-25.50 3.50-22.00 3.60-23.00 3.60-25.00
# Base Rate system replaced BPLR system with effect from July 1, 2010.

So, again monetary transmission is not working as per RBI expectations.  Banks are still sluggish in raising rates. The continued global uncertainty and poor quality of data continue to complicate matters.

2 Responses to “Monetary Transmission is working somewhat”


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  2. What do you mean by Teaser Rates? « Mostly Economics Says:

    […] By Amol Agrawal In second quarter review of monetary policy (see this, this, and this as well), RBI took some measures to discourage teaser loans by Indian banks.   This blog has […]

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