In India, deposit rate adjusts more quickly to changes in the policy rate: IMF
International Monetary Fund (IMF), in a recent release, pointed out existence of asymmetries in Indian monetary policy. There is a need for empirical evidence on the effects of monetary policy in India, says Sonali Das, IMF Economist. In her research paper titled 'Monetary Policy in India: Transmission to Bank Interest Rates', the IMF official noted that there is a significant pass-through of policy changes to bank interest rates in India. The paper shed light on ‘extent of pass-through from monetary policy to interest rates of Indian banks, effects of monetary tightening and loosening on bank interest rates, changes in monetary policy operating framework, among others,’ as key factors that impact monetary policy. It explained pass-through mechanism from monetary policy changes to bank interest rates in two steps- one from the monetary policy rate to the inter-bank market rate which is the operating target of the framework and two from the target rate to bank interest rates (deposit and lending rates). In this regard, the paper says that extent of pass-through to deposit rate is larger than that of lending rate and deposit rate adjusts more quickly to changes in the policy rate. Citing evidence of asymmetric adjustment to monetary policy, the paper noted that ‘while deposit rates adjust downwards to loosening, the lending rate adjusts more quickly to monetary tightening than to loosening, it pointed out.’ As changes in lending rates are only one part of the bank lending channel, future research on bank lending behavior is needed to better understand transmission through the bank lending channel in India, it added. It is noteworthy here that the Reserve Bank of India (RBI), on June 2, 2015, had announced its Monetary Policy Statement, 2015-16. Under this, the Central Bank had taken decision to reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 7.5 % to 7.25 %, continue with overnight/term variable rate repos and reverse repos to smooth liquidity, among other key decisions.
June 29, 2015 | 7:14 pm IST.
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