Incomplete transmission of policy rates could delay reversal of rate cycle by RBI
inflation, but incomplete transmission of the 250 basis point policy rate hikes since May 2022 could delay reversal of the rate cycle by the Reserve Bank .
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Transmission in loan and deposit rates ranged between 111 and 245 bps until May 2024, an analysis of the latest RBI data indicates. The only exception is the loans linked to external benchmarks, where full transmission is immediate.
The one year median marginal cost of funds-based lending rate (MCLR) increased by 175 bps ( one basis point is 0.01 percent) during May 2022 to May 2024. In the same period, the weighted average lending rate (WALR) on fresh rupee and outstanding rupee loans increased by 188 bps and 111 bps, respectively.
To be sure the Reserve Bank of India has kept its benchmark policy repo rate unchanged at 6.5 percent for eight-bi monthly policies in a row citing that it is looking at inflation aligning to the target band on a durable basis and also expressing concerns over rising food inflation.
The weighted average domestic term deposit rate (WADTDR) on fresh deposits and outstanding deposits increased by 244 bps and 190 bps bps, respectively during the same period
The pass-through to WALR on fresh rupee loans and WADTDR on fresh deposits was higher for public sector banks than private banks, while transmission to WALR on outstanding loans was higher for private banks.
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