Reserve Bank of India had made a lot of efforts to activate the interest rate channel by working out various methodological changes in determination of prime lending rates. Application of marginal cost of funds based lending rates and demonetization in 2016 are the recent attempts to improve the working of monetary transmission through rate of interest. In this context, the present study attempts to analyze the interest rate pass-through in India using threshold co-integration. Utilizing monthly data for a period of twenty two years (1996: 4 to 2018: 3), it has been concluded that interest rate pass-through in India is still incomplete. The lending rates responded instantaneously in case of increasing discrepancy, but, it got worse for the decreasing discrepancy. The rigidity in lending rates can be attributed to ever increasing non-performing assets, oligopolistic structure of Indian credit markets and structural rigidities resulting from rigidities in re-pricing of fixed deposits, subsidized credit facilities and government borrowings.
Interest rate pass-through, monetary transmission mechanism, threshold autoregressive model, error correction mechanism, prime lending rate
