INSUBCONTINENT EXCLUSIVE:
RBI has cut the repo rate by 115 basis points in 2020Soured loans and weak capital positions mean Indian banks cannot cut their interest
rates in step with the central bank's main policy rate, reducing the effectiveness of the monetary policy, the Reserve Bank of India said in
a working paper on Tuesday
The paper, co-authored by RBI monetary policy committee member Janak Raj and three others, said concerns about asset quality must be
channel of monetary transmission exists in India
Its efficacy, however, is impaired by poor asset quality but reinforced by better capital position of banks," the authors said in the
credit channel was stronger among state-run banks than private banks
Credit growth in India has slowed sharply over the last two years despite massive interest rate reductions by the RBI
stance of monetary policy and reduction in the policy repo rate (starting from 2019) helped cushion the credit deceleration
In the absence of a sharp cut in the policy repo rate, the slowdown in credit growth would have been far more severe," the paper suggests
The RBI has cut the repo rate by 115 basis points in 2020 amid the COVID-19 pandemic, following 135 bps of cuts in 2019.Banks' capital
positions may also mean they are unable to cut the rates they charge as far or as fast as the central bank, and improving them could have
bolstered credit growth to some extent, the paper said
impact on the credit channel, it is imperative that the asset quality concerns of banks are addressed and that their capital positions are
strengthened," the authors concluded.
