Policy Transmission
The process by which a change in the central bank's policy rate passes through to lending and deposit rates in the economy.
Formula
Transmission = Change in Bank Lending Rate / Change in Policy Rate, over the period examined
Unit
%
In depth
Transmission is neither complete nor immediate: banks pass on rate cuts more slowly than rate hikes, and deposit rates move more slowly than lending rates. This asymmetry was the reason the Reserve Bank required floating-rate retail loans to be linked to an external benchmark from 2019, which forced faster and more visible pass-through. Transmission is weaker when banks are recapitalising, when credit demand is weak, or when a large share of deposits is in fixed-rate term instruments. Understanding it explains why a policy rate cut can fail to reach borrowers for several quarters.
Worked example
A 100 basis point cut in the repo passes through as 45 basis points of lower lending rates in six months — 45% transmission. Externally benchmarked loans reprice fully at the next reset, while older loans do not.
Illustrative figures, chosen so the arithmetic is easy to follow. Not a live price and not a valuation of any company.
Educational reference only
This entry explains what “Policy Transmission” means. It is not investment advice and not a recommendation to buy or sell any security. Any numbers above are illustrative, not live prices, and nothing here predicts price direction or rates a stock. Consider your own circumstances and consult a SEBI-registered investment adviser before acting.