Is the Monetary Policy Transmission to Bank Lending Rates in India Efficient? A Comparison between Public Sector Banks’ (PSBs) Median Benchmark Interest Rates and Repo Rate during 2011-2017

Abstract

With the opening up of Indian financial markets and with global economic forces comes into play, there is much deviation in Reserve Bank of India's (The Central Bank) monetary policy frame-work. Since the implementation of Liquidity Adjustment Facility, monetary policy in India has undergone a significant shift. The conventional monetary policy of controlling CRR and SLR has given way to concepts like Repo and Reverse Repo. But how these policy rates can evoke the desired action from Banks so as to effectively transmit the policy rates to bank lending? An empirical study of the rate pass-through (the effect of policy rates on bank lending rate) might bring an insight into the influential power of the repo rate in the contemporary monetary policy and specific reactions of Public Sector Banks to these policy rates. This paper examines the relationship between benchmark rates and repo rate and founds that the newly introduced system of benchmarking (MCLR) has improved the rate pass through.