Published Paper Details:

Monetary Policy Transmission (via banking channel) is the process through which the changes in RBI Repo rates transmit into various sections like retail, MSME segment via changes in banks deposits and advances rates. RBI ultimate monetary policy objective is to maintain inflation within tolerance level while supporting economic growth. Indian financial system is banking dominated, so it is important to analyse the nuances of monetary Policy transmission to gauge the ultimate impact and efficacy of Monetary Policy. Author observes that Monetary Policy rates affect deposits and advances rates differently therefore transmission is unequal as the banks efficiency and asset liability structure differ with one another. Historically lower transmission has been persistent, Even though RBI had taken several steps to ensure that better transmission takes place, most recently it has introduced EBLR to enhance Monetary Policy Transmission yet there is still lag in the transmission due to sticky nature of deposits and floating nature of advances to a large extent. In current financial year (FY 2023-24) so far, transmission is more on deposits than advances. This is possible due to CASA (Current & Saving deposits). Despite of increase in Policy Rates this financial year, banks are maintaining good margin, profitability owing to low cost CASA among other factors. As per RBI, approximately 48% of loans and advances are still linked to MCLR (Marginal cost of funding-based lending rate) i.e. good proportion of loans and advances are linked to MCLR, which is less transmittable rate. Author concludes that transmission through banking channel will further improve if banks deposits are also made floating and proportion of EBLR loans and advances rises in the Indian Banks.