REPO RATE CUTS ARE LOST IN TRANSMISSION

Since February, the Reserve Bank of India (RBI) has lowered the repo rate by 100 basis points.

- PUNEET KUMAR ARORA & JAYDEEP MUKHERJEE

So far, the cuts have passed through only partially, with the lending rates reflecting just part of the policy move. Some furrate-cut decision at the monetary policy meeting amid low inflation. The uneven transmission reflects the cautious behaviour of the banks: while stronger domestic demand and goods and services tax (GST) rate rationalization could support lending, pressures to protect deposits and subdued investment appetite amid global headwinds mean banks will be in no hurry to slash rates sharply.

SKEWED SIGNALS

LATEST DATA highlights the familiar asymmetry in monetary transmission: deposit rates tend to adjust faster and more fully, while lending rates move slowly and partially. Between February and July, against a cumulative cut of 100 basis points (bps), lending rates fell by 53 bps and deposit rates by 101bps.

The 2019-22 easing phase, driven by pandemic-related shocks, saw lending rates drop 232 bps (93%) and deposit rates 259 bps (104%), nearly mirroring the 250 bps cut, as weak credit demand and precautionary savings produced an unusually strong pass-through.

In the 2022-25 tightening phase, a 250 bps repo hike saw deposit rates rise by 259 bps, an effective passthrough of over 100%, while lending rates increased by a smaller 181 bps, or roughly 72%, cushioning savers.

For borrowers, this means limited relief when rates fall, as lending costs decline gradually. For savers, returns on deposits adjust faster, boosting income during a hike cycle but also leading to a quick erosion after rate cuts.

RATE CONTRAST