Monetary policy transmission in India under the base rate and MCLR regimes: a comparative study

The paper estimates the degree of pass-through of monetary policy to bank lending rates under both the base rate and the marginal cost of funds-based lending rate (MCLR) regimes using dynamic panel data regression. Using nine different models for nine individual bank-specific variables, the study estimates that a 100 basis point increase in the policy rate leads to an increase in the weighted average lending rate on fresh rupee loans sanctioned by banks over the long run by 26-47 basis point-depending on the model specification- during the MCLR regime as against 11-19 basis point during the base rate regime. Hence, irrespective of the model chosen, transmission is higher during the MCLR regime than base rate regime. The alignment of liquidity management with the monetary policy stance, the introduction of the flexible inflation targeting (FIT) framework and the deceleration in economic activity reducing credit demand could be contributory factors for better transmission during the MCLR regime.