RBI Pointed Out Multiple Challenges That Hinder Monetary Transmission to Bank Rates

The RBI Bulletin for July 2021 noted that the central bank has made several attempts to improve the effectiveness of monetary transmission by refining the process of interest rates set by banks.

RBI Pointed Out Multiple Challenges That Hinder Monetary Transmission to Bank Rates

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Although transmission of deposit and lending rates has significantly improved in recent times, several factors continue to obstruct effective monetary transmission to these bank rates, the Reserve Bank of India (RBI) has said.

The RBI Bulletin for July 2021 noted that the central bank has made several attempts to improve the effectiveness of monetary transmission by refining the process of interest rates set by banks.

Noting that the recent developments in respect of transmission to deposit and lending rates have shown improvement, it said: “However, there are several factors which continue to impede monetary transmission to deposit and lending rates of banks.”

The factors include mismatch of banks’ assets and liabilities, competitive pressure for small savings schemes, and assets quality of scheduled commercial banks.

Internal benchmark for pricing of loans and heterogenous pricing methodology of NBFCs also are factors that hinder the effective transmission of rates.

The Bulletin said that monetary transmission in the current easing cycle, so far, has been full across the money market segments and corporate bond market, mainly on account of liquidity augmenting measures, including unconventional measures, taken by the RBI.

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

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