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Banks in India slow in passing on RBI rate changes: IMF Paper

International Monetary Fund

Washington:  Showing an anti-consumer bias in the Indian banks’ approach on interest rates, a new IMF study shows they are faster in effecting a hike in lending rates, but a rise in their deposit rates is not so quick.

The IMF research also showed that banks are as such slow in effecting a change in their 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 has said 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 wrote.

The International Monetary Fund (IMF) has earlier also flagged the issue of lenders in India rather quicker in responding to the central bank’s monetary tightening measures.

The issue has been raised by various commentators in India also, 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.

“For both the deposit rate and lending rate, the speed of adjustment to changes in the policy rate has also increased in the later part of the sample,” she observed.

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.

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