Banks have passed on higher interest rates effected by the RBI the quickest in the last three rate increase cycles, data from the central bank shows. This is largely due to the regulator mandating the linking of lending rates to external benchmarks.
“Monetary policy transmission to bank lending and deposit rates has been stronger in this cycle compared to previous cycles” the Reserve Bank of India said In its latest Financial Stability Report.
Transmission to outstanding lending rates was 112 basis points (one basis point or bps is 0.01 percent) or 45% of the total tightening of 250 bps tightening between May 2022 and February 2023. But in the previous two tightening cycles of July 2013 to December 2014 and June 2018 to Jan 2019 the transmission to outstanding lending rates was negligible data show.
Even in case of deposits, the transmission is faster than the previous cycles. Transmission to outstanding deposit rates in the latest cycle is 69 percent or 172 bps compared to a 20 bps or a 40 percent transmission in the 2018-19 cycle and a negative transmission in the 2013-14 cycle. By and large, transmission has been higher on term deposits as savings rates still tend to be rigid.
The distribution of outstanding loans across interest rates buckets also reflects faster transmission, the RBI said. The share of total outstanding loans in the interest rate range of more than 9 percent rose from 30.7 percent in March 2022 to 57.8 percent in September 2023. Outstanding loans with interest rates less than 9 percent on the other hand declined from 69.3 percent to 42.2 percent.
One of the reasons for quicker transmission of rates is that the Reserve Bank has mandated banks to adopt external benchmarks to price their loans. Most banks have linked their pricing to the repo rate. As a result, they have to reprice loans immediately after the central bank signals a change in the repo rate.
“ The increasing share of EBLR-linked loans with shorter reset periods and the increase in the MCLRs aided transmission to WALR on outstanding loans of scheduled commercial banks” the Reserve Bank said in its latest monetary policy report.
The share of external benchmark based lending Rate (EBLR) linked loans in total outstanding floating rate rupee loans of commercial banks was 53.3 percent at end-September 2023 while that of MCLR linked loans was 41.9 percent.
