Improving monetary transmission

19 AUG,2019 | MEDC


 

Unlike in the developed world (except Japan and Germany) where the primary source of money borrowed by domestic entrepreneurs is the capital market, in India it still remains the banking system. That is why it is imperative that the RBI’s interest rate cuts be immediately passed down to the commercial banks for their lending purposes. The Indian banking system’s search for an ideal benchmark for loan rates has been going on unsuccessfully for the past quarter century. In this context, it may be worth considering two benchmarks – one for loans and the other for deposits. If we remain fixated with monetary transmission for loans alone, the good customers of the commercial banks may end up subsiding the bad ones, leading to adverse selection.

*Photo Credit: Google

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