## _wp15129

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---

### I. Introduction and research questions
- Focus: pass-through from the policy rate to bank deposit and lending rates in India, emphasizing the credit (bank lending) channel.
- Timeframe referenced: "over the last twelve years."
- RBI context:
  - RBI statements cited: March 4, 2015 (pass-through of past policy rate cuts to lending rates as a prerequisite for further monetary easing) and April 7, 2015 (lending rate sensitivity to the policy rate).
- Key research questions:
  - What is the extent and speed of pass-through from monetary policy to deposit and lending rates of Indian banks?
  - Is pass-through symmetric? Or do episodes of monetary tightening and loosening have different effects on bank interest rates?
  - Has pass-through changed over time, with changes to the monetary policy operating framework?

### II. Methodological approach
- Two-step estimation strategy:
  - Step (i): estimate pass-through from the monetary policy rate to the interbank market rate (operating target, WACMR).
  - Step (ii): estimate pass-through from the operating target (WACMR) to bank interest rates (deposit and lending rates).
- Rationale: first step indicates how well framework controls target market rate; stepwise approach yields clearer interpretation than a VECM with three cointegrating relationships.
- Econometric method: error-correction models (VECM/E-CM) allowing:
  - estimation of long-run relationships and speed of adjustment,
  - estimation of asymmetric adjustment parameters (responses to policy rate increases vs decreases).

### III. Monetary policy operations and institutional context
- Key developments and instruments:
  - Interim Liquidity Adjustment Facility (ILAF) introduced April 1999; transition toward full LAF through periodic modifications.
  - Since November 2004, LAF operated using overnight fixed rate repos and reverse repos.
  - LAF intended to operate in a deficit liquidity mode; liquidity contained around +/- one percent of all banks’ net demand and time liabilities (NDTL).
  - On May 3, 2011 the LAF was enhanced; weighted average overnight call money rate recognized as the operating target.
  - Liquidity provision shifted from overnight repos to term repos of varying maturities in recent fine-tuning.
- Collateral and liquidity rules:
  - Banks pledge government securities as collateral; most pledges should be over and above securities held to comply with statutory liquidity ratio (SLR).
  - SLR historical values cited: was 25% in 2002; decreased from 22% to 21.5% in February 2015.
- Acronyms used: LAF, ILAF, NDTL, SLR, CRR, WACMR, VECM, SR VECM, LR VECM, PLR, base rate, repo rate.

### IV. Bank lending rates, base rate reform, and transmission issues
- PLR and base rate reform:
  - PLR: interest rate at which a bank lends to its most credit-worthy borrowers.
  - Base rate system effective July 1, 2010 (RBI Circular 2009-10/390; dated April 9, 2010).
  - Under base rate system:
    - A bank’s base rate is the minimum rate at which it can lend; loans priced as base rate plus borrower-specific charges for credit risk.
    - Banks must calculate base rate accounting for: cost of funds, costs of complying with CRR and SLR, overhead costs, and profits.
    - Banks use own formula to calculate base rate; RBI stipulates consistent calculation and supervisory availability.
- Factors limiting pass-through:
  - Banks may use average cost of funds instead of marginal cost of funds as inputs to base rate calculation.
  - The share of fixed versus variable rate products in loan portfolios affects how responsive banks’ interest income is to base rate changes.

### V. Data and descriptive statistics
- Sample: end-March 2002 to end-October 2014; two-week frequency; 328 observations.
- Data sources: CEIC and Datastream (CEIC sources these data series from the RBI).
- Variables include: reverse repo rate, repo rate, WACMR, rate on three-month certificates of deposit, prime lending rate (average of five major banks), daily net LAF injection (averaged over two-week periods), bank balance-sheet data (bi-weekly).
- Selected descriptive statistics (preserved verbatim as presented):
  - Reverse repo rate 5.56 1.14 3.25 7.5
  - WACMR 6.30 1.82 2.42 10.5
  - Repo rate 6.99 1.09 4.75
  - Deposit rate, 3-month 7.03 2.05 3.4 11.5
  - LAF net injection/NTDL (%) 0.22 1.26 -3.21 2.93
  - Prime lending rate 13.4 2.12 10.1 16.3
  - Cash reserve requirement 5.26 1.06 4 9
  - Bank Securities/Loans 52.01 5.63 6.9 85.7
  - Statutory liquidity ratio 24.40 0.83 22 25
  - Bank Loans/Assets 61.0 6.04 49.0 68.3

### VI. Time-series setup and identification
- Time-series properties: All variables I(1) except LAF net injection (I(0)).
- Lag length: four two-week periods (Hannan and Quinn criterion; Schwarz BIC suggested 2 but autocorrelation tests motivated longer lag).
- Step 1 identification: repo rate weakly exogenous to WACMR in main specification; alternative effective policy rate uses reverse repo rate when liquidity surplus and repo rate when deficit (LAFnetinj > 0 or < 0).
- Step 2 identification: VECM with two cointegrating relationships (WACMR–lending rate and WACMR–deposit rate); lending rate and deposit rate treated as weakly exogenous to WACMR.
- Asymmetric adjustment test: error-correction terms split into positive and negative components to test responses to WACMR decreases (loosening) vs increases (tightening).

### VII. Empirical results — Step 1 (policy rate → WACMR)
- Cointegration: trace statistics indicate a cointegrating vector between repo rate and WACMR.
- Long-run estimates:
  - Coefficient on repo rate in Appendix Table 1A: 1.287, indicating a long-run elasticity between the repo rate and the WACMR of 1.43.
  - Alternate specification:
    - Long-run elasticity of WACMR with respect to reverse repo rate: 0.48.
    - Long-run elasticity of WACMR with respect to repo rate: 0.99.
    - These two elasticities together are approximately the same as the single-repo estimate.
- Short-run adjustment:
  - Adjustment parameter α = -0.06 (WACMR adjusts by 6 percent per time period toward repo after deviation).
  - Implication: 5.6 months (11.2 two-week periods) to achieve 50% of pass-through from an increase in the repo rate.

### VIII. Empirical results — Step 2 (WACMR → deposit and lending rates)
- Long-run elasticities (Appendix Table 2a, reported in text):
  - Elasticity of the lending rate with respect to WACMR: 0.30.
  - Elasticity of the three-month deposit rate with respect to WACMR: 1.11.
- Short-run adjustment coefficients (Appendix Table 2b, reported in text):
  - Lending rate adjustment coefficient: -0.042 → 4.2 percent adjustment per time period toward WACMR; 8.1 months to achieve 50% pass-through.
  - Deposit rate adjustment coefficient: -0.081 → described as 4.1 months to achieve 50 percent of pass-through.
- Symmetric-assumption summary:
  - First step: 5.6 months for 50% repo → WACMR pass-through.
  - Second step: 4.1 months for 50% WACMR → deposit pass-through; 8.1 months for 50% WACMR → lending pass-through.

### IX. Cumulative pass-through and composite timing
- Cumulative long-run elasticities (combining steps):
  - Elasticity of deposit rate with respect to repo rate: 1.58.
  - Elasticity of lending rate with respect to repo rate: 0.43.
- Interpretation examples:
  - A 1 percentage point increase in the repo rate is associated with a 1.58 percentage point increase in the deposit rate over time.
  - Pass-through to lending is partial (0.43), consistent with longer loan maturities vs three-month deposit maturity.
- Speed-of-adjustment summary (Table 4, author’s calculations):
  - Repo → WACMR adjustment coefficient: -0.060; Number of periods 11.2; Number of months 5.6.
  - WACMR → Lending adjustment coefficient: -0.042; Number of periods 16.2; Number of months 8.1.
  - WACMR → Deposit adjustment coefficient: -0.081; Number of periods 8.2; Number of months 4.1.

### X. Empirical results — Asymmetric speed of adjustment
- Main asymmetry findings:
  - Lending rate adjusts more quickly to an increase in WACMR than to a decrease.
  - Deposit rate adjusts downward when WACMR falls, but shows no significant upward adjustment when WACMR rises (in full-sample results).
- Selected asymmetric VECM estimates (Table 5, full sample; standard errors in parentheses):
  - Lending rate:
    - ECT1 pos (lending) -0.033 (0.022)
    - ECT1 neg (lending) -0.042*** (0.009)
  - Deposit rate:
    - ECT2 (deposit) 0.010 (0.025)
    - ECT2 pos (deposit) -0.111*** (0.007)
    - ECT2 neg (deposit) -0.033 (0.032)
  - Observations 324; overall model statistics presented as 0.73 0.07.

### XI. Robustness and split-sample analysis
- Sample split:
  - Period (i): end-March 2002 to end-August 2010.
  - Period (ii): September 2010 to end-October 2014 (LAF in deficit continuously since September 9, 2010).
- Long-run pass-through (LR VECM results, Appendix Table 3A):
  - WACMR → lending rate:
    - Apr2002-Aug2010: elasticity 0.20
    - Sep2010-Oct2014: elasticity 0.32
  - WACMR → deposit rate:
    - Apr2002-Aug2010: elasticity 1.33
    - Sep2010-Oct2014: elasticity 0.71
  - Cumulative finding for later part of sample: extent of pass-through to the lending rate increased to a cumulative elasticity of 0.46 with respect to the policy rate.
- Short-run dynamics (SR VECM, split sample):
  - Deposit rate: 50 percent of the pass-through from a change in WACMR occurs in 2.1 months (recent period).
  - Lending rate: 50 percent of the pass-through from a change in WACMR occurs in 5.3 months (recent period).
  - SR pass-through elasticities (WACMR → rates), split sample:
    - Lending rate: Apr2002-Aug2010 0.20; Sep2010-Oct2014 0.32.
    - Deposit rate: Apr2002-Aug2010 1.33; Sep2010-Oct2014 0.71.
  - Full-sample SR estimates for comparison:
    - Lending rate pass-through elasticity (WACMR): 0.30.
    - Deposit rate pass-through elasticity (WACMR): 1.11.
- Asymmetric adjustment across subsamples:
  - Lending rate: asymmetry present in both periods (examples: ECT1 neg (lending) -0.053*** and -0.061*** for Apr2002-Aug2010 and Sep2010-Oct2014 respectively in split-sample SR results).
  - Deposit rate: first period shows adjustment downward to loosening but not upward to tightening; recent period shows deposit rate adjusts similarly to loosening and tightening (asymmetry less evident).
- Robustness checks:
  - Alternative specifications: one-year deposit rate instead of three-month deposit rate; prime lending rates of individual large banks instead of the average PLR.
  - Result: quantitatively very similar to main results.

### XII. Main conclusions and implications
- There is significant, albeit slow, pass-through of policy changes to bank interest rates in India.
- Extent of pass-through:
  - Larger for deposit rates than for lending rates (long-run elasticities: deposit 1.11 WACMR; lending 0.30 WACMR in full-sample).
  - Cumulative elasticities with respect to repo rate: deposit 1.58; lending 0.43.
- Speed of adjustment:
  - Repo → WACMR: 5.6 months to 50% pass-through.
  - WACMR → deposit: 4.1 months to 50% pass-through (full-sample); 2.1 months in recent period.
  - WACMR → lending: 8.1 months to 50% pass-through (full-sample); 5.3 months in recent period.
- Asymmetric behavior:
  - Lending rates adjust more quickly to monetary tightening than to loosening.
  - Deposit rates historically adjusted downward to loosening but not upward to tightening; asymmetry for deposit rates is less evident in the recent period.
- Policy/research implication:
  - Because changes in lending rates are only one part of the bank lending channel, further research on bank lending behavior is needed to better understand transmission through the bank lending channel in India.

*Source: _wp15129 (excerpts, VECM results, and discussion).*

### 1.   Bank Base Rates and Prime Lending Rates ...........................................................................

### 1. Bank Base Rates and Prime Lending Rates

### I. Introduction and research questions
- Focus: pass-through from the policy rate to bank deposit and lending rates in India, emphasizing the credit (bank lending) channel.
- Timeframe referenced: "over the last twelve years."
- RBI policy context and concerns:
  - RBI has expressed concern over lack of policy rate pass-through to lending rates and deposit rates.
  - Recent RBI statements cited: March 4, 2015 (pass-through of past policy rate cuts to lending rates as a prerequisite for further monetary easing) and April 7, 2015 (lending rate sensitivity to the policy rate).
- Key research questions the paper addresses:
  1. What is the extent and speed of pass-through from monetary policy to deposit and lending rates of Indian banks?
  2. Is pass-through symmetric? Or do episodes of monetary tightening and loosening have different effects on bank interest rates?
  3. Has pass-through changed over time, with changes to the monetary policy operating framework?

### II. Methodological approach
- Two-step estimation strategy:
  - Step (i): estimate pass-through from the monetary policy rate to the interbank market rate that is the operating target of the framework.
  - Step (ii): estimate pass-through from the target rate to bank interest rates (deposit and lending rates).
- Rationale for stepwise estimation:
  - First step indicates how well the framework is set up to control its target market rate.
  - Stepwise approach yields clearer interpretation than a VECM with multiple (three) cointegrating relationships.
- Econometric method: error-correction models (VECM/E-CM)
  - Allows estimation of long-run relationships and speed of adjustment to long-run pass-through.
  - Allows estimation of asymmetric adjustment parameters (differential responses to policy rate increases vs decreases).

### III. Literature context (select points)
- Cross-country and developing-country findings:
  - Mishra and Montiel (2012): conclude monetary transmission appears weak in developing countries.
  - Mishra et al. (2014): find large variation in bank lending rate responses to monetary policy shocks, with weaker transmission in developing countries.
- India-specific studies:
  - Sengupta (2014): VAR 1993–2012; finds structural break around introduction of Liquidity Adjustment Facility (LAF) in 2000; bank lending channel remained important; interest rate and asset price channels strengthened.
  - Singh (2011): VAR March 2001–June 2012; finds significant contemporaneous pass-through under deficit liquidity conditions and significant lagged effects (example: a one percentage point change in the repo rate leads to a 75–80 basis point change in several short-term rates, and a 50 basis points change in medium and long-term rates).
  - Mohanty (2012): quarterly structural VAR; policy rate increases negatively affect output growth with a lag of two quarters and moderate inflation with a lag of three quarters; effects persist for eight to ten quarters.
  - Bhaumik et al. (2011): 2000–2007; using average prime lending rate (PLR) as proxy for monetary policy, find banks decrease loan supply in response to PLR increases in tight money periods; note that using PLR as policy indicator assumes complete and quick pass-through and thus may miss price responses by banks.

### IV. Monetary policy operations in India and operating framework details
- Evolution and instruments:
  - Interim Liquidity Adjustment Facility (ILAF) introduced April 1999; transitioned toward full LAF through periodic modifications.
  - Since November 2004, LAF operated using overnight fixed rate repos and reverse repos with banks.
  - LAF intended to operate in a deficit liquidity mode to ensure more effective monetary transmission, with liquidity contained around +/- one percent of all banks’ net demand and time liabilities (NDTL).
  - On May 3, 2011 the LAF was enhanced; explicit recognition of the weighted average overnight call money rate as the operating target of monetary policy.
  - Liquidity provision has shifted from overnight repos to term repos of varying maturities in recent fine-tuning.
- Collateral and liquidity regulations:
  - Banks pledge government securities as collateral; most should be over and above securities held to comply with statutory liquidity ratio (SLR).
  - Statutory liquidity ratio (SLR) historical values cited: was 25% in 2002; decreased from 22% to 21.5% in February 2015.
- Acronyms and technical terms used in analysis: LAF, ILAF, NDTL, SLR, CRR, WACMR (weighted average call money rate), VECM, SR VECM, LR VECM, PLR, base rate, repo rate.

### V. Bank lending rates, base rate reform, and transmission issues
- Prime Lending Rate (PLR) and base rate reform:
  - PLR: interest rate at which a bank lends to its most credit-worthy borrowers.
  - Transparency concerns led RBI to institute a "base rate" system effective July 1, 2010 (RBI Circular 2009-10/390; dated April 9, 2010).
  - Under base rate system:
    - A bank’s base rate is the minimum rate at which it can lend; loans are to be priced from the base rate plus borrower-specific charges for credit risk.
    - Banks must calculate base rate taking into account: cost of funds, costs of complying with certain regulations (CRR and SLR), overhead costs, and profits.
    - Banks use their own formula to calculate base rate, with RBI stipulating consistent calculation and supervisory availability.
- Factors potentially limiting pass-through to base rates:
  - Banks use different measures of cost of funds as inputs; some use average cost of funds instead of marginal cost of funds—this has been noted as a potential reason for lack of responsiveness of base rates to policy rate changes.
  - Share of fixed interest rate versus variable interest rate products in banks’ loan portfolios matters: higher share of outstanding variable rate loans benchmarked to base rate implies future interest income varies more with base rate changes.

### VI. Empirical focus and anticipated contributions
- Empirical focus: estimate extent and speed of pass-through, test for symmetry, and examine changes over time coinciding with changes to the monetary policy operating framework.
- Contribution: provides new evidence on monetary policy transmission in India using stepwise error-correction modeling to separately assess:
  - Transmission from monetary policy rate to operating target (interbank market rate / WACMR).
  - Transmission from the operating target to banks’ deposit and lending rates (base rate and PLR).

*Source: _wp15129 - 1.   Bank Base Rates and Prime Lending Rates (excerpts).*

### Chapter IV of the Patel Committee Report (RBI 2014) discusses likely impediments to

### _wp15129 - Chapter IV of the Patel Committee Report (RBI 2014) discusses likely impediments to

### Likely impediments and scope
- The report groups likely impediments to monetary transmission into three broad categories: (i) fiscal dominance, (ii) the large informal sector, and (iii) financial and credit market frictions.
- Chapter IV provides exploratory evidence of an asymmetric effect of the policy rate on deposit and lending rates in India.

### Data and descriptive statistics
- Sample: end-March 2002 to end-October 2014; each observation is a two week period (328 observations).
- Data sources: CEIC and Datastream (CEIC sources these data series from the RBI).
- Interest-rate and balance-sheet variables: reverse repo rate, repo rate, WACMR (weighted-average call money rate), rate on three-month certificates of deposit, prime lending rate (average of five major banks), daily net LAF injection (averaged over two-week periods), bank balance-sheet data (bi-weekly).
- Key descriptive statistics (as presented in Table 1, preserved verbatim):
  - Reverse repo rate 5.56 1.14 3.25 7.5
  - WACMR 6.30 1.82 2.42 10.5
  - Repo rate 6.99 1.09 4.75
  - Deposit rate, 3-month 7.03 2.05 3.4 11.5
  - LAF net injection/NTDL (%) 0.22 1.26 -3.21 2.93
  - Prime lending rate 13.4 2.12 10.1 16.3
  - Cash reserve requirement 5.26 1.06 4 9
  - Bank Securities/Loans 52.01 5.63 6.9 85.7
  - Statutory liquidity ratio 24.40 0.83 22 25
  - Bank Loans/Assets 61.0 6.04 49.0 68.3

### Empirical method
- Time-series properties: All variables are I(1) except the LAF net injection, which is I(0).
- Lag length: four two-week periods (chosen using the Hannan and Quinn information criterion; Schwarz BIC suggested 2 but autocorrelation tests motivated longer lag).
- Step 1 — Pass-through to WACMR from monetary policy:
  - Two-stage error-correction model estimating long-run pass-through and short-run dynamics, with repo rate as the primary policy-rate variable and alternative specification including reverse repo rate depending on liquidity (LAFnetinj > 0 or < 0).
  - Identifying assumption: repo rate is weakly exogenous to WACMR.
  - Mean elasticity of WACMR with respect to the repo rate defined as (mean WACMR)/(mean RepoRate).
- Step 2 — Pass-through to bank interest rates from WACMR:
  - VECM with two cointegrating relationships: WACMR–lending rate and WACMR–deposit rate (Johansen’s trace statistic suggests two cointegrating relationships among WACMR, deposit rate, and lending rate).
  - Identifying assumptions: lending rate and deposit rate are weakly exogenous to WACMR.
  - Error-correction coefficients measure speed of adjustment of lending and deposit rates to deviations from long-run relationships.
- Asymmetric speed of adjustment:
  - Error-correction terms are split into positive and negative components to test asymmetry in responses to monetary loosening (WACMR decrease) vs tightening (WACMR increase).

### Results — Step 1 (policy rate → WACMR)
- Cointegration: trace statistics indicate a cointegrating vector between repo rate and WACMR.
- Estimated coefficients (reported in text):
  - Coefficient on repo rate in Appendix Table 1A: 1.287, indicating a long-run elasticity between the repo rate and the WACMR of 1.43.
  - Alternate specification (effective policy rate = reverse repo rate in surplus, repo rate in deficit):
    - Long-run elasticity of WACMR with respect to reverse repo rate: 0.48.
    - Long-run elasticity of WACMR with respect to repo rate: 0.99.
    - These two elasticities together are approximately the same as the single-repo estimate.
- Short-run adjustment:
  - Adjustment parameter α = -0.06 (WACMR adjusts by 6 percent per time period toward repo after deviation).
  - Implication: 5.6 months (11.2 two-week periods) to achieve 50% of pass-through from an increase in the repo rate.

### Results — Step 2 (WACMR → deposit and lending rates)
- Long-run elasticities (Appendix Table 2a, reported in text):
  - Elasticity of the lending rate with respect to WACMR: 0.30 (only 30% of a change in WACMR passed on to lending rate in long run).
  - Elasticity of the three-month deposit rate with respect to WACMR: 1.11.
- Short-run adjustment coefficients (Appendix Table 2b, reported in text):
  - Lending rate adjustment coefficient: -0.042 → 4.2 percent adjustment per time period toward WACMR; 8.1 months to achieve 50% pass-through.
  - Deposit rate adjustment coefficient: -0.081 → 8.1 percent? (text states coefficient of -0.081 indicating 4.1 months to achieve 50 percent of pass-through).
    - Text summary: deposit rate adjusts more quickly, with 4.1 months to 50% pass-through.
- Symmetric-assumption summary:
  - First step: 5.6 months for 50% repo → WACMR pass-through.
  - Second step: 4.1 months for 50% WACMR → deposit pass-through; 8.1 months for 50% WACMR → lending pass-through.

### Cumulative pass-through and adjustment
- Cumulative long-run elasticities (combining steps):
  - Elasticity of deposit rate with respect to repo rate: 1.58.
  - Elasticity of lending rate with respect to repo rate: 0.43.
- Interpretation:
  - A 1 percentage point increase in the repo rate is associated with a 1.58 percentage point increase in the deposit rate over time.
  - Pass-through to lending is partial (0.43), consistent with longer loan maturities vs three-month deposit maturity.
- Speed-of-adjustment summary (Table 4, author’s calculations):
  - Repo → WACMR adjustment coefficient: -0.060; Number of periods 11.2; Number of months 5.6.
  - WACMR → Lending adjustment coefficient: -0.042; Number of periods 16.2; Number of months 8.1.
  - WACMR → Deposit adjustment coefficient: -0.081; Number of periods 8.2; Number of months 4.1.
  - Total adjustment coefficients and timing combine to the reported cumulative paths (depicted in Figure 4).

### Results — Asymmetric speed of adjustment
- Evidence of asymmetry in pass-through:
  - Lending rate adjusts more quickly to an increase in WACMR than to a decrease.
  - Deposit rate adjusts downward when WACMR falls, but shows no significant upward adjustment when WACMR rises.
- Selected asymmetric VECM estimates (Table 5, full sample; standard errors in parentheses; significance levels preserved):
  - Lending rate:
    - ECT1 pos (lending) -0.033 (0.022)
    - ECT1 neg (lending) -0.042*** (0.009)
  - Deposit rate:
    - ECT2 (deposit) 0.010 (0.025)
    - ECT2 pos (deposit) -0.111*** (0.007)
    - ECT2 neg (deposit) -0.033 (0.032)
  - Observations 324 (columns report 324 observations); overall model statistics 0.73 0.07 (as presented).
  - F tests for ECT asymmetry reported in the table (p-values not reproduced beyond table display).

### Robustness and subsample analysis
- Sample split into two periods to account for changes in operating framework and base-rate system:
  - Period (i): end-March 2002 to end-August 2010.
  - Period (ii): September 2010 to end-October 2014 (LAF in deficit continuously since September 9, 2010).
- Robustness results (summary reported in text):
  - Extent of pass-through to the deposit rate decreased somewhat in the later period.
  - Pass-through to the lending rate increased in the later period.
  - The speed of transmission to both deposit and lending rates increased in the later period.

*Source: Chapter IV of the Patel Committee Report (RBI 2014), as summarized in the supplied content unit.*

### Appendix Table 3A shows the results of the long-run stage of the VECM estimated over the

### _wp15129 - Appendix Table 3A shows the results of the long-run stage of the VECM estimated over the

### Long-run pass-through (LR VECM results)
- Sample period covered: end-March 2002 to end-October 2014.
- Extent of pass-through from the WACMR to the lending rate:
  - Apr2002-Aug2010 (first part): elasticity 0.20
  - Sep2010-Oct2014 (recent period): elasticity 0.32
- Extent of pass-through from the WACMR to the deposit rate:
  - Apr2002-Aug2010 (first eight years): elasticity 1.33
  - Sep2010-Oct2014 (last four years): elasticity 0.71
- Cumulative finding for later part of sample:
  - Extent of pass-through to the lending rate increased to a cumulative elasticity of 0.46 with respect to the policy rate.

### Short-run dynamics (SR VECM results)
- Estimated speeds of adjustment (split sample):
  - Deposit rate: 50 percent of the pass-through from a change in WACMR occurs in 2.1 months (recent period).
  - Lending rate: 50 percent of the pass-through from a change in WACMR occurs in 5.3 months (recent period).
- SR pass-through elasticities (WACMR → rates), split sample:
  - Lending rate:
    - Apr2002-Aug2010: 0.20
    - Sep2010-Oct2014: 0.32
  - Deposit rate:
    - Apr2002-Aug2010: 1.33
    - Sep2010-Oct2014: 0.71
- Full-sample SR estimates (for comparison):
  - Lending rate pass-through elasticity (WACMR): 0.30
  - Deposit rate pass-through elasticity (WACMR): 1.11

### Asymmetric adjustment
- Asymmetry in adjustment of lending and deposit rates to monetary tightening vs loosening:
  - Lending rate:
    - Asymmetric adjustment to monetary tightening and loosening is present in both periods.
    - ECT coefficients show negative adjustment terms for lending in some specifications (e.g., ECT1 (lending) -0.042*** in full-sample LR results; split-sample SR results show ECT1 neg (lending) -0.053*** and -0.061*** for Apr2002-Aug2010 and Sep2010-Oct2014 respectively).
  - Deposit rate:
    - In the first period, deposit rates adjust downward to loosening but not upwards to tightening.
    - In the recent period, estimated adjustment coefficients suggest the deposit rate adjusts similarly to both loosening and tightening (asymmetry for deposit rates less evident in the recent period).
  - Table 4A (asymmetric VECM, split sample) reports separate ECT pos/neg coefficients indicating these asymmetries (examples preserved in tables).

### Robustness checks and specification alternatives
- Alternative specifications estimated as robustness checks:
  - Use of average deposit rate on deposits with a one year maturity instead of the three month deposit rate.
  - Use of prime lending rates of individual large banks in turn, instead of the average prime lending rate.
- Result of robustness checks:
  - The results are quantitatively very similar to those presented.

### Main conclusions and implications
- There is significant, albeit slow, pass-through of policy changes to bank interest rates in India.
- The extent of pass-through to the deposit rate is larger than to the lending rate, and deposit rates adjust more quickly to changes in the policy rate.
- Evidence of asymmetric adjustment:
  - Deposit rates historically did not adjust upwards in response to monetary tightening, but did adjust downwards to loosening.
  - Lending rates adjusted more quickly to monetary tightening than to loosening.
- In the later part of the sample, both the extent of pass-through to the lending rate and the speed of adjustment for deposit and lending rates to policy changes have increased.
- Policy/research implication:
  - As changes in lending rates are only one part of the bank lending channel, future research on bank lending behavior is needed to better understand transmission through the bank lending channel in India.

*Source: _wp15129 - Appendix Table 3A and accompanying text (VECM results and discussion).*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2015/_wp15129.pdf_