Journal Press India^®

Author Details ( * ) denotes Corresponding author

This paper looks into the monetary policy transmission from policy rate to lending rates of all scheduled commercial banks as well as the different groups within it viz, public sector banks, private sector banks and foreign banks. It analyzes the changes in the speed of adjustment parameters during the three regimes viz, the base rate, the marginal cost of funds based lending rate (MCLR) and the external benchmark linked lending rate (EBLR) when various changes in the policy framework were carried out so as to improve the pass through from the policy rate to the lending rates. The time period considered is from 2013 March to 2023 June. The results show that the lending rates are affected by the call money rate, bank credit deposit ratio and other macroeconomic variables. Secondly there is a progressive increase in the speed of adjustment in the later regimes in most of the cases indicating that the RBI’s endeavour of increasing the pass through has been successful.

Keywords

Monetary transmission; Policy rate; Lending rate

1. Acharya, V. (2017). Monetary transmission in India: Why is it important and why hasn’t it worked well? Inaugural Aveek Guha Memorial Lecture, Tata Institute of Fundamental Research. RBI Bulletin, 7-16.
2. Aleem, A. (2010). Transmission mechanism of monetary policy in India. Journal of Asian Economics, 21(2), 186-197.
3. Bernanke, B. S. & Gertler, M. (1995). Inside the black box: The credit channel of monetary policy transmission. Journal of Economic Perspectives, 9(4), 27-48.
4. Beyer, C, M. R., Chen, R., Misch, F. Li. C., Qztuck, E. O., & Ratnovski, L. (2024). Monetary policy pass-through to interest rates: Stylized facts from 30 European countries. IMF Working Paper No. 2024/009.
5. Bhaumik, S. K., Dang, V. & Kutan, A. M. (2010). Implications of bank ownership for the credit channel of monetary policy transmission: Evidence from India. William Davidson Institute Working Paper No. 988. Retrieved from http:/ssrn.com/abstract=1646612
6. Bhoi, B. K, Mitra, A. K., Singh, J. B. & Gangadharan, S. (2017). Effectiveness of alternative channels of monetary policy transmission: some evidence for India. Macroeconomics and Finance in Emerging Market Economies, 10(1), 19-38. Retrieved from https://doi.org/10.1080/17520843.2016.1188837
7. Das, S. (2015). Monetary policy in India: Transmission to bank interest rates. IMF Working Paper No. WP/15/129.
8. Dickey, D, A. & Fuller, W, A. (1979). Distribution of the estimators for autoregressive time series with a unit root. Journal of the American Statistical Association, 74, 427-431.
9. Goyal, A. & Aggarwal, D., K. (2017). Monetary transmission in India: Working of price and quantum channels. IGIDR Working Paper No. 2017-017.
10. Holton, S. & D’Acri, C., R. (2018). Interest rate pass through since the euro area crisis. Journal of Banking and Finance, 96, 277-291.
11. John, J., Rath, D. P., Raj, J. & Mitra, A. (2016). Asset quality and monetary transmission in India. RBI Occasional Paper, 37(1& 2), 35-62.
12. Kapur, M. & Behera, H. (2012). Monetary transmission mechanism in India: A quarterly model. RBI Working Paper Series No. 09/2012.
13. Kumar, A. (2022). Monetary transmission to banks’ interest rates: Implications of external benchmark regime. RBI Bulletin, April 2022.
14. Li, H., Ni, J., Xu, Y. & Zhan, M. (2021). Monetary policy and its transmission channels: Evidence from China. Pacific Basin Finance Journal, 68, 1-19.
15. Marques, L. B., Gelos, G., Harjes, T., Sahay, R. & Xue, Y. (2020). Monetary policy transmission in emerging markets and developing economies. IMF Working Paper No. WP/20/35.
16. Mishra, A. & Burns, K. (2017). The effect of liquidity shocks on the bank lending channel: Evidence from India. International Review of Economics and Finance, 52, 56-76.
17. Mishra, P., Montiel, P. & Sengupta, R. (2016). Monetary transmission in developing countries: Evidence from India in Ghate C & Kletzer K edt. Monetary policy in India - A Modern Macroeconomic Perspective. Springer, 59-110.
18. Mishra, P., Montiel, P. & Spilimbergo, A. (2012). Monetary transmission in low-income countries-effectiveness and policy implications. IMF Economic Review, 60(2), 270-302.
19. Mitra, A., K. & Chattopadhyay, S. K. (2020). Monetary policy transmission in India: Recent trends and impediments. RBI Bulletin March 2020.
20. Muduli, S. & Behera, H. (2020). Bank capital and monetary policy transmission in India. RBI Working Paper No. 12/2020.
21. Mukherjee, S. & Bhattacharya, R. (2011). Inflation targeting and monetary policy transmission mechanisms in emerging market economies. IMF Working Paper No. WP/11/229.
22. Narasimham Committee I (1991). Committee on Financial System, Government of India. Retrieved from https://ibbi.gov.in
23. Narasimham Committee II (1998). Committee on Banking Sector Reforms, Government of India. Retrieved from https://the1991project.com
24. Pandit, B. & Vashist, P. (2011). Monetary policy and credit demand in India and some EMEs. ICRIER WP, No. 256.
25. Patra, M. D., Kapur, M., Kavediya, R. & Lokare, S. M. (2016). Liquidity management and monetary policy: From corridor play to marksmanship. In Ghate, C and Kletzer K M edt. Monetary Policy in India- A Modern Macroeconomic Perspective. Springer.
26. Pesaran, M., Shin, Y. & Smith, R. J. (2001). Bounds testing approaches to the analysis of level relationships. Journal of Applied Economics, 16(3), 289-326.
27. Phillips, P. & Perron, P. (1988). Testing for unit root in time series regression. Biometrica, 75, 335-346. Retrieved from https://doi.org/10.2307/2335701
28. Prabhu, E. & Ray, P. (2019). Monetary policy transmission in financial markets: Empirical evidence from India. Economic and Political Weekly, LIV(13), 68-74.
29. Rangarajan, C. (2020). The new monetary policy framework- What it means. NIPFP Working Paper No. 297.
30. RBI (2017). Report of the internal study group to review the working of the marginal cost of fund-based lending rate system. Retrieved from https://www.studocu.com
31. Reddy, Y., V. (1999). Monetary policy operating procedure in India in Bank of International Settlements (Ed.) Monetary policy operating procedures in emerging market economies BIS Policy Papers No. 5, 99-109.
32. Singh, B. (2011). How asymmetric is the monetary policy transmission to financial markets in India? RBI Occasional Paper, 32(2), 1-37.