Examine the monetary policy transmission lag in India and the steps taken by the RBI to improve pass-through to lending rates.

Introduction:

RBI's Annual Report 2024-25 shows that of the 250-bp repo cut between February-October 2025, only 165 bps has transmitted to fresh-rupee lending rates and 120 bps to outstanding loans by March 2026. The transmission lag of 6-9 quarters remains the chief operational constraint of monetary policy under Section 45ZB of the RBI Act 1934.

Anatomy of the lag: Monetary transmission flows through three channels — interest-rate, credit and asset-price. The interest-rate channel is muted by sticky deposit costs (deposits are 65% of bank funding, RBI March 2026), the asset-liability mismatch on long-tenor housing loans, and the inability of banks to reset old-rate deposits when the repo rate falls.

RBI reforms: The MCLR regime (April 2016) and the External Benchmark Lending Rate (October 2019) — mandating new floating-rate retail and MSME loans be benchmarked to repo or T-bill — have lifted transmission. EBLR loans now form 60% of outstanding credit (FSR December 2025). The Liquidity Management Framework 2020 with WACR as operational target, the bi-monthly MPC, and the Standing Deposit Facility (April 2022) have tightened corridor management.

Continuing gaps: Small-savings rate stickiness (PPF 7.1%, NSC 7.7%) competes with bank deposits; NBFC capital-market funding transmits faster than banks; informal-sector and MUDRA lending remains rate-insensitive due to risk premiums.

Way forward:

RBI and DEA should reformulate small-savings rates quarterly per the Shyamala Gopinath Formula by FY27, extend EBLR to corporate loans, and use the SDF curve to compress transmission to under three quarters.