Indian banks slow in passing on RBI rate changes: IMF report

Report finds evidence of asymmetric adjustment to monetary policy

A new IMF study shows that Indian banks are faster in effecting a lending rate hike, but not so quick in raising deposit rates. 

The IMF research also showed that banks are slow in effecting a change in interest rates pursuant to the changes announced by RBI in its policy rates.

In her research paper on 'Monetary Policy in India: Transmission to Bank Interest Rates', IMF Economist Sonali Das said that there is fresh evidence about "significant, albeit slow, pass-through of policy rate changes to bank interest rates in India".

"There is evidence of asymmetric adjustment to monetary policy -- the lending rate adjusts more quickly to monetary tightening than to loosening. In addition, the speed of adjustment of deposit and lending rates to changes in the policy rate has increased in recent years," she said.

The issue has been flagged by the International Monetary Fund (IMF) earlier too.

The problem has also been raised by various commentators in India, including RBI Governor Raghuram Rajan,  that banks tend to resist passing on the policy rate cuts to consumers.

The latest IMP paper said the "extent of pass-through to the deposit rate is larger than that to the lending rate, and the deposit rate adjusts more quickly to changes in the policy rate".

"Second, there is evidence of asymmetric adjustment to monetary policy: throughout most of the sample period, deposit rates do not adjust upwards in response to monetary tightening, but do adjust downwards to loosening, and the lending rate adjusts more quickly to monetary tightening than to loosening," Das said.

The study has studied the monetary policy transmission in India from end-March 2002 to end-October 2014. However, the extent of pass-through to the lending rate increased in the later part of the sample period.

The research paper further said changes have been made to the monetary policy operating framework and the base rate system was put into place in 2010, which might have strengthened the monetary policy transmission in recent years.

It further said that deposit rates are expected to have an effect on lending rates as deposit rates make up part of a bank's cost of funds, which should in turn affect the cost at which a bank lends out funds.

"The relationship between the rate on deposits of a particular maturity and the lending rate could be weak, however, when deposit instrument under consideration does not make up an important part of the bank's borrowed funds and since lending rate decisions are determined only in part by the bank's cost of funds," it added.