How monetary transmission may hold key to policy stance, Das clarifies

After the February 2024 monetary policy review meeting, Reserve Bank of India (RBI) Governor Shaktikanta Das clarified why the stance of the policy continued to be 'withdrawal of accommodation'. 

“Our policy stance is in terms of interest rate, which is the principal tool of monetary policy in the current framework,” Das said. He explained that the stance of 'withdrawal of accommodation' should be seen in the context of incomplete transmission of interest rates, and inflation staying above the target of 4 per cent.

The monetary policy committee of the RBI had hiked the policy repo rate by 250 basis points (bps) between May 2022 and February 2023 before hitting a pause. Commercial banks borrow money from the RBI at the repo rate, which also acts as the benchmark rate for banks lending to retail and small borrowers. 

The data shows that in response to 250-bp repo rate hike, bank have revised their repo-linked external benchmark-based lending rates (EBLRs) upward by the same magnitude.

However, transmission is incomplete for marginal cost of fund-based lending rate (MCLR), as well as weighted average lending rate (WALR) on both fresh and outstanding loans.

On the deposit side, the weighted average domestic deposit rates on fresh deposits have fallen in January compared to December, while those on outstanding deposits have marginally increased during the same period.