A research paper from Reserve Bank of India (RBI) shows that transmission of monetary policy signals to financial markets in India is asymmetrical.
It is asymmetrical because the transmission is faster and persistent when the monetary system is in deficit mode, than when it is in expansionary phase, the paper argues.
The liquidity in the banking system is tight with banks borrowing more than Rs 1 lakh crore from the RBI. But banks are also sitting on excess government bonds valued at Rs 3 lakh crore that they could have lent, but not doing so because of fear of more bad loans in a slowing economy.
The paper points out that a developed and integrated financial markets are pre-requisites for effective and credible transmission of monetary policy impulses.
The transmission of monetary policy works well in the call money rate, as it is impacted immediately with robustness.
The central bank to boost growth has been reducing key policy rates. It has cut key policy rate -repo rate by 100 basis point since April 2012 to boost growth.
However, the lending rates have not reflected this easing with just about 40 basis points reduction in lending rates by banks.
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