Weak monetary transmission limits the effect of policy-rate changes in India. Discuss, and suggest reforms.

Monetary transmission is how a change in the repo rate passes through to bank lending and deposit rates, then to spending, and finally to prices. The RBI raised the repo rate by 25 bps to 5.5% in October 2026 under "calibrated tightening" [2], up from 5.25% in August [1]. That hike will work only if this chain holds, and in India the pass-through is slow and partial.

Why transmission is weak

• Opaque loan pricing: RBI's Internal Study Group (2017) found that pass-through was slow and incomplete under the Base Rate and MCLR systems. It was muted for outstanding loans and asymmetric across rate cycles [3].
• Legacy loans: loans linked to the MCLR or Base Rate stay on those rates until repayment or renewal, so part of the loan book does not respond to the repo rate [4].
• Sticky deposit costs: fixed-rate term deposits make up most of bank funding. Administered small savings rates compete for the same savings, so banks resist changing their rates.
• Food-driven inflation: food has a high share in India's CPI basket [5]. A repo hike cannot fix supply shocks such as crop damage.
• Time lags: the RBI projected CPI to peak at 5.9% in Q3 and ease to 5.5% in Q4 [1]. An October hike will mostly take effect after that peak.
• Structural gaps: informal credit, a shallow corporate bond market and heavy government borrowing weaken the rate signal.

Reforms

• Widen external benchmarking: in 2019 the RBI required new floating-rate retail and MSE loans to be linked to the repo rate or T-bill yields, reset at least once every three months [4]. This should be extended to large corporate loans, and the move of old MCLR loans to the new system should be speeded up.
• Flexible deposits: promote floating-rate deposits, and set small savings rates strictly by formula, as the Shyamala Gopinath Committee recommended.
• Deepen markets: develop the corporate bond and money markets so that rate signals reach borrowers outside banks.
• Policy coordination: keep to the FRBM path to reduce crowding out. The Centre should handle food supply through buffer stocks and trade measures [5].
• Communication: forward guidance and prompt minutes (released 14 days after the August meeting [1]) help anchor expectations.

Weak transmission therefore comes from rigid loan pricing, the structure of deposits and supply-driven inflation, not from the repo rate alone. Wider external benchmarking, flexible deposits and fiscal–food coordination would let small, calibrated steps [2] work faster. Stronger pass-through is essential to meet the 4% CPI target under Section 45ZA of the RBI Act while protecting growth, in line with SDG 8.