Improved monetary policy transmission brings down interest rate: Eco Survey

The Economic Survey on Friday said that the monetary policy transmission has improved resulting in fast lowering of interest rate for borrowers.

Despite reduction in rates by 250 basis points since February 2019, credit growth of banks slowed down to 6.7 per cent as on January 1, 2021.

The credit offtake from banking sector witnessed a broad-based slowdown in 2020-21 due to the outbreak of COVID-19 pandemic.

"RBI has reduced repo rate by 250 bps since February 2019 (the current easing cycle). The transmission of policy repo rate changes has been weak on quantity of credit. However, there has been improved transmission on rate structure and term structure," the survey said.

As a result of accommodative monetary policy during 2020, the RBI has cut benchmark repo rate cut by 115 bps since March 2020 with 75 bps cut in first Monetary Policy Committee (MPC) meeting in March 2020 and 40 bps cut in second meeting in May 2020.

Also, systemic liquidity in 2020-21 remained in surplus while RBI undertook various conventional and unconventional measures to manage liquidity situation in the economy.

"This year (2020) saw improvement in transmission of policy repo rates to deposit and lending rates, as reflected in the decline of 94 bps and 67 bps in weighted average lending rate on fresh rupee loans and outstanding rupee loans respectively from March 2020 to November 2020," the survey tabled by Finance Minister Nirmala Sitharaman.

Similarly, it said, the weighted average domestic term deposit rate declined by 81 bps during the same period, it said.

Across bank groups, it said, private sector banks exhibited greater transmission in terms on fresh loans, however, public sector banks exhibited greater transmission on outstanding loans for the entire easing cycle.

Apart from the reduction in term deposit rates, many banks also lowered their saving deposit rates during the current easing cycle. The saving deposit rates of five major banks, which ranged 3.25-3.5 per cent prior to the introduction of the external benchmark (in end September 2019), were placed at 2.7-3.0 per cent as on January 15, 2021.

"The flexible adjustment of saving deposit rates bodes well for monetary transmission to lending rates," it said.

According to the pre-budget survey, the recovery rate for the scheduled commercial banks through IBC (since its inception) has been over 45 per cent.

Due to the pandemic, initiation of corporate insolvency resolution process (CIRP) was suspended for any default and the suspension along with continued clearance has allowed a small decline in accumulated cases.

The survey said that the financial flows to the real economy however remained constrained on account of subdued credit growth by both banks and non-banking financial corporations.

The higher reserve money growth did not fully translate into commensurate money supply growth due to the lower (adjusted) money multiplier reflecting large deposits by banks with RBI under reverse repo.