With banks resisting passing on RBI's interest rate cuts to consumers, the IMF on Wednesday said lenders in India are rather quicker in responding to the central bank's monetary tightening measures.
Besides, the deposit rates of the banks do not adjust upwards in response to monetary tightening, but they do adjust downwards to monetary loosening, the International Monetary Fund (IMF) said.
It takes 13 months on an average for pass-through from a change in the RBI's policy rate to the interbank rate. Thereafter it takes over nine months for change deposit rates for customers and much longer period of nearly 19 months in case of lending rates.
RBI cut its policy rate (repo) earlier this month, but most banks are yet to pass on the benefits to the consumers, while similar was the case for RBI's last rate cut in January.
In the paper on 'Effectiveness of Monetary Policy Transmission in India', the IMF said the analysis "finds evidence of significant, albeit slow, pass-through of policy rate changes to bank interest rates in India".
"There is evidence of asymmetric adjustment to monetary policy -- deposit rates do not adjust upwards in response to monetary tightening but do adjust downwards to loosening, while the lending rate adjusts more quickly to monetary tightening than to loosening," it said.
The paper further said that the monetary policy transmission in India is often thought to be characterised by "long and uncertain time lags".
"This hinders policy making by making it difficult to predict the effects of policy actions on the economy," it said, while adding that the concerns about transmission are not unique to India, as the effectiveness of monetary policy transmission in developing countries as a whole has recently come into question.
The research paper has analysed interest rate and credit channels of monetary transmission, while focusing on issues like extent of pass-through from changes in the monetary policy rate to deposit and lending rates of banks in India.
It has also looked into the speed of adjustment to policy rate changes and the response to tightening and loosening measures.
The pass-through from monetary policy to bank interest rates has been measured into two steps -- from the monetary policy rate (repo rate) to the interbank market rate that is
targeted by the monetary policy framework (weighted average call money rate (WACMR)), and then from the target rate (WACMR) to bank interest rates (deposit and lending rates).
The analysis found that the pass-through to deposit and lending rates is slower and the deposit rate adjusts more quickly to monetary policy changes than does the lending rate.
In the first step of transmission, it takes 13 months for 80 per cent of the pass-through from a change in the repo rate to the WACMR. Then 80 per cent of a change in the WACMR passes through to the deposit rate in 9.5 months, and to the lending rate in 18.8 months.
"There is evidence of asymmetry in the pass-through to bank interest rates. The estimates of the speed of adjustment coefficients indicate that the lending rate adjusts more quickly to an increase in WACMR than to a decrease.
"Similarly, the estimated speed of adjustment coefficients indicate that the deposit rate adjusts downwards when WACMR falls, but not upwards to a monetary tightening," it said.
