Monetary Policy Transmission in India
Challenges
Monetary policy transmission refers to the process by which changes in the RBI's policy rate (repo rate) pass through the financial system to eventually affect output and prices. While the repo rate is an overnight rate, its impact should ideally cascade to bank lending rates, bond yields, and ultimately household borrowing costs and business investment decisions. In India, this transmission has historically been imperfect and slow.
- External Benchmark Lending Rate (EBLR): Since October 2019, the RBI mandated that retail and MSME loans be linked to external benchmarks (primarily the repo rate), directly linking loan rates to policy changes and improving transmission speed.
- Marginal Cost of Funds-based Lending Rate (MCLR): Used for older loans and some corporate credit; incorporates banks' marginal cost of raising funds, making transmission slower and partial.
- Factors impeding transmission: High NPA (Non-Performing Asset) levels impacting bank risk appetite; administered savings rates (like small savings schemes) that compete with bank deposits; structural liquidity conditions.
- The RBI periodically publishes a Monetary Policy Transmission report assessing how much of policy rate changes have been passed through to lending and deposit rates.
- One full transmission cycle (repo cut → lower EMI for borrowers) can take 6–18 months in the Indian context.
● Tracked since February 06, 2026 · last seen April 08, 2026 · updates as the daily brief publishes
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