MPC member Ashima Goyal: Full transmission of policy repo to loan rates not happening

Full transmission of the change in policy repo to loan rates may not be happening as non-food credit of banks account for less than 50 per cent of the annual flow of resources available to the commercial sector, according to monetary policy committee member Ashima Goyal.

“Under FIT (Flexible Inflation Targeting), policy transmission occurs best through keeping the repo rate at an appropriate level, determined by domestic factors. Rates transmit through both banks and markets,” said Goyal, also Emeritus Professor AT Indira Gandhi Institute of Development Research, Mumbai.

For example, non-food credit of banks as a percentage of the annual flow of resources available to the commercial sector has averaged 44.3 per cent over 2007-23, she added.

The MPC member opined that competition from other sources may mean less than full transmission of policy repo to loan rates but points to growing diversity, maturity, fall in spreads and rising efficiency in the Indian financial sector. Market rates also rise with repo rates.

In his last monetary policy statement, RBI Governor Shaktikanta Das noted that the total flow of resources to the commercial sector from banks and other sources, at ₹31.2 lakh crore during 2023-24, was significantly higher than that of last year (₹26.4 lakh crore).

“Credit growth continues to be robust. The slight slackening in momentum, especially in categories with sharp growth, is desirable since credit spikes create risk.

“India’s relatively low credit/GDP ratio has to rise, but it is best if this happens gradually so that it is sustainable,” Goyal said.

According to the latest monetary policy report (MPR), the transmission (of the cumulative 250 basis points repo rate hike effected between May 2022 and February 2023) to banks’ lending and deposit rates continued in H2 (October-March):2023-24, with banks increasing rates on the back of persistent credit demand.

The 1-year median marginal cost of funds-based lending rate (MCLR) of scheduled commercial banks (SCBs) increased by 15 basis points (bps), reflecting the higher cost of borrowing.

The weighted average lending rates (WALRs) on outstanding and fresh rupee loans witnessed marginal change, with WALR on outstanding rupee loans increasing by 1 bp and that on fresh rupee loans declining by 2 bps during H2: 2023-24 (up to February 2024).

In response to the cumulative increase of 250 bps in the policy repo rate since May 2022, the WALRs on fresh and outstanding rupee loans of SCBs increased by 185 bps and 111 bps, respectively, in the current tightening phase -- May 2022 to February 2024.

On the deposit side, the weighted average domestic term deposit rates (WADTDRs) on fresh and outstanding rupee deposits of SCBs increased by 12 bps and 17 bps, respectively, in H2:2023-24 (up to February 2024). The WADTDRs on fresh and outstanding rupee deposits of SCBs increased by 241 bps and 183 bps, respectively, from May 2022 to February 2024

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