According to Standard Chartered analysts, the incomplete transmission of monetary policy easing remains a major issue in the current easing cycle for the Indian economy.

Key Quotes

“The Monetary Policy Committee (MPC) has cut rates by 75bps to 5.75% since February, moving its stance from neutral to accommodative and eased liquidity to a INR 1tn surplus from June-July 2019 (versus an average INR 0.4tn deficit from June 2018-May 2019). However, banks’ lending rates have fallen only slightly, in a sharp contrast to market rates.”

“Less-than-desired policy transmission so far is likely due to usual time lags, worries about a potential rise in non-performing assets (NPAs) in the next few quarters and banks’ increased pricing power. As the current easing cycle is only six months old, we believe transmission will improve in the next few quarters. The first round of downward adjustments in rates has already started. However, transmission through the interest rate channel may remain gradual on banks’ concerns about NPAs increasing in the next few quarters due to issues with non-bank financial companies (NBFCs). Banks’ improved pricing power in the absence of competition from NBFCs has also likely delayed transmission.”

“We believe the policy easing cycle needs to continue for a longer period to achieve the desired transmission.”

“Other than growth-inflation dynamics, we think the MPC needs to consider the trade-off between quick but short-lived cycles and incomplete transmission while deciding future rate action. Past cycles show that quick and deep rate cuts reversed in a short period do not fully benefit the economy; we thus expect the MPC to calibrate its future rate action.”

“We maintain our call of a 25bps rate cut at the August meeting and see a risk of cuts beyond August given benign growth/inflation dynamics. The Reserve Bank of India’s (RBI’s) assurance of ample liquidity for the rest of FY20 (ending March 2020) will be key to facilitate policy transmission, in our view.”