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Monetary policy has asymmetric transmission in Indian financial markets

September 05, 2023

Monetary policy has asymmetric transmission in Indian financial markets
Risk pricing of AAA-rated paper, which was lower during low demand and high liquidity, has not moved up commensurately even though the credit demand has picked up and liquidity dried up, reflecting inadequate risk premium, according to State Bank of India’s economic research department (ERD).

The ERD opined that monetary policy has asymmetric transmission in Indian financial markets.
 
The ERD noted that the spread between AAA-rated corporate bond and 10-year risk-free Government Security (G-Sec) rates, which was around 120 basis points (bps) during March/April 2020, has declined significantly since then.
 
“This trend has continued even as the rate cycle changed direction since April’2022 and is now even significantly less than half of the average spread at pre pandemic level i.e. in FY20,” said Soumya Kanti Ghosh, Group Chief Economic Adviser, SBI.
 
A one per cent increase in repo rate has resulted into only 2 to 3 bps increase in 10 year AAA corporate bond spread, 3 to 4 bps increase in 5 year AAA corporate bond spread.
 
However, there has been around 31 bps decrease in spread of three-year AAA corporate bond, signifying that 3 year AAA corporate bonds are not priced with adequate risk premium and they could have been at least be priced at 26-43 bps higher rate, the ERD said.
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