Will the New Loan Pricing Norms Achieve Monetary Policy Transmission

Abstract

A central bank depends on the financial system to ensure smooth and timely monetary transmission. India’s financial system is dominated by banks and any failure of monetary policy signals to reach the economy at large becomes a matter of concern since it indicates that the Reserve bank of India (RBI) has failed to have a favourable impact on the business cycle. Apparently, there have been lopsided responses by banks to RBI’s policy actions. When the monetary policy is tightened through a hike in policy rates, banks are quick to hike interest rates on loans given. When the monetary policy is eased through a reduction in policy rates, banks are slow in reducing interest rates on loans given. The RBI has made attempts to address this issue for quite some time now. It now wants banks to price their loans in kilter with external benchmarks.