The RBI cut its policy rate to 5.25% late last year - and has held it there since.
And yet, the cost of borrowing is rising.
This is because interest rates are not set only by central banks. When credit grows faster than deposits, banks run short of savings to lend. So they bid up wholesale funding rates to source money from the market. That raises their cost of funds. And that cost gets passed on.
The policy rate is the headline. The banking system's balance sheet is the reality.
For investors, this is a useful reminder: the cost of capital is a market phenomenon first, and a policy decision second. Watch the system, not just the announcement.
Back to Writing