Economics

Monetary policy transmission in India under the base rate and MCLR regimes: a comparative study

S. K. Chattopadhyay and A. K. Mitra

This research by Sadhan Kumar Chattopadhyay and Arghya Kusum Mitra delves into the transmission of monetary policy to bank lending rates in India, highlighting a significant difference in pass-through effects between the base rate and MCLR regimes. Their findings suggest a more responsive lending environment under MCLR, emphasizing the influence of liquidity management and economic conditions.

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Abstract

This paper estimates the pass-through of monetary policy to bank lending rates in India under the base rate and marginal cost of funds-based lending rate (MCLR) regimes using dynamic panel data regression. A 100 basis point increase in the policy rate leads to a long-run increase in the weighted average lending rate on fresh rupee loans of 26-47 basis points under MCLR, compared to 11-19 basis points under the base rate regime. The study attributes the better transmission under MCLR to aligned liquidity management, the flexible inflation targeting framework, and decelerating economic activity.

Publisher

Humanities & Social Sciences Communications

Published On

Jul 13, 2023

Authors

Sadhan Kumar Chattopadhyay, Arghya Kusum Mitra

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