Monetary policy, rate transmission are asymmetric, says SBI report

The impact of the monetary policy and rate transmission has been asymmetrical across the debt market in the country, according to a report by the State Bank of India (SBI).

The report said 1 per cent increase in repo rate has resulted in only 2 to 3 basis points (bps) increase in 10-year AAA corporate bond spread (spread between 10-year AAA corporate bonds and 10-year government securities). It is 3-4 bps for the 5-year AAA corporate bond spread.

In comparison, the shorter tenure 3-year AAA corporate bond has seen a 31 bps decline in spread. This is because the market is unlikely to have factored in adequate risk premium, the report said.

According to the analysis by the research team of SBI, it should have been priced 26-43 bps higher.

“A 1 per cent increase in repo rate increases CP-weighted yield by 120 bps for up to 31-day tenor. It is by 147 bps in 31 days to 91 days, 178 bps in 92 days to 180 days and lower at 151 per cent in 181 days to 365 days tenor. Our further estimates suggest that 180-365 days CPs are priced exuberantly and are under priced by up to 90 bps,” said Soumya Kanti Ghosh, group chief economic adviser, State Bank of India.

While observing this, he said credit and G-sec markets move in the same direction due to rate action. So, monetary policy has asymmetric transmission in the Indian financial markets.