Asymmetrical Rate Transmission: Little Room For Manoeuvre

Every time the Reserve Bank of India (RBI) changes the policy repo rates, there is a flurry of activity as banks recalibrate their lending and deposit rates accordingly. But, usually, there’s a method to the madness. When policy rates go up, lending rates are the first to follow suit, and when policy rates go down, the deposits get hit first. In both cases, the borrowers and depositors are left at a disadvantage. The good news is that the gap is slowly closing compared to data from previous years. Let’s understand why such asymmetry exists. The Asymmetry According to the latest bi-annual monetary policy report released in September 2022, between February 2019 and March 2022, the repo rate reduced by 250 basis points (bps). One bps is equal to 0.01 per cent. In the same period, rates on fresh deposits (weighted average for retail and bulk) reduced by 259 bps, while the...