Hello everyone,      

Welcome to the 105th edition of The Pattern, a weekly newsletter where we dive into the latest from the world of economy, finance and technology. Let’s get started.  

This week, it’s become increasingly clear that RBI rate cuts are a long way off. RBI raised the repo rate by 250 basis points (bps) between May 2022 and February 2023, aiming to rein in inflation. Ever since, it has kept the policy rate unchanged at 6.5% and it may continue to do so for some time to come. Here are a few reasons why.    

The most obvious reason being that inflation is yet to align to RBI’s 4% target. Add to it the possibility of further inflationary pressures considering fresh tensions in West Asia. However, there’s another major hurdle to rate cuts — incomplete monetary policy transmission!   

For the uninitiated, incomplete transmission means that rate hikes/cuts don’t translate to proportional rise/dip in interest rates, in the context of credit.  

Although loans linked to external benchmarks (floating-rate loans) have been repriced, those linked to the marginal cost of funds-based lending rate (MCLR), read corporate loans, are lagging the rate hikes. The last mile of transmission is generally hard as over 40% of system credit is not linked to the repo rate.    

The latest half-yearly monetary policy report points to a 65-bps lag as per weighted average interest rate of fresh loans issued between 2022 (beginning of monetary policy tightening) and 2024.  

Without durable signs of disinflation and full monetary policy transmission, there is merit in keeping key rates rate unchanged.  But only if monetary policymaking was that easy. Given the classic growth-inflation trade-off, the pressure on central banks to cut rates is enormous.  

Monetary policy is like juggling balls; there are no easy trade-offs. However, this time around, the GDP Gods seem to favour us. India's strong growth trend, driven by capital expenditure and productivity points to a Goldilocks economy – not hot enough to give inflation a fillip, but growing fast enough to evade a recessionary environment.   

Between the digits  

• 7%: Projected GDP growth in FY2024-25, according to the RBI  

• 83.54: The value of the rupee against the dollar on Tuesday – an all-time low 

• 151 million: Number of Demat accounts in March 2024 

Reading list  

• IMF projection: A tale of fickle GDP forecasts, in charts  

• How can lenders grow their loan books during times of credit contraction?  

• What does it take to keep interest rates dynamic in digital lending?  

• How to test impact of interest rate changes on credit decisioning outcomes?  

Thank you for reading. If you liked this edition, forward it to your friends, peers, and colleagues. You can also connect with me on Twitter  here  and follow  FinBox on LinkedIn  to always get all updates. 

Cheers, 

Mayank 

All opinions expressed are my own and do not necessarily reflect the views of FinBox or its promoters.