OPERATION TRANSMISSION: TIME NOW FOR A SURGICAL STRIKE

Invert, always invert," said legendary investor Charlie Munger. As the 'Dil maange more' chorus for a rate cut reaches a crescendo, what is top of mind for the policymakers is how to ensure transmission of rate impulses permeates through the system in a seamless and timely manner. For that, we need to invert! We should look at policy action not from the MPC framework and mandate point of view, but from how banks respond to policy rate cuts and see what impedes transmission and how to address them.

- SRINIVASAN VARADARAJAN & KANIKA PASRICHA

To understand the transmission dynamics, we need to acknowledge that transmission has been effective for a set of borrowers while some others have yet to gain in a similar manner. Large corporates, retail customers seeking collateralized loans and existing SME borrowers have benefited because of their access to capital markets and loans linked to external benchmark-linked rates (EBLR). On the contrary, transmission has been lagging in MCLRlinked loans, as also fresh loans to customers who primarily rely on banks for their funding (neo-corporates). Let's peel the onions more.

The Reserve Bank of India (RBI) front-loaded 100bps rate cuts during February-June. In April, it also changed the stance to accommodative, and made liquidity conditions very comfortable. With the last 50 bps rate cut, it reverted to neutral stance by June, and absorbed the excess liquidity from the system to ensure that the call rate stays aligned to the repo rate. This seeded some confusion in the market, with participants becoming nervous about the continuity of the rate cut cycle. Hence, clear communication is very crucial to ensure market responses in line with policy objectives.