Global financial services firm Nomura has opined that though the RBI hiked its policy

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rates for 10 times over the past 15 months, transmission effect was most effective in the current cycle only, as banks' lending rates have peaked even the 2008 high of 13.75 per cent.

"The transmission of the Reserve Bank's policy rate hikes to systemic commercial bank lending rates has been most effective in the current cycle. Due to the tight liquidity, the lending rates are higher even with a lower repo (short- term lending) rate," Nomura Global Chief Economist Sonal Varma said in a research note issued here today.

Nomura has used State Bank's prime lending rate as a proxy for arriving at the systemic lending rates, since the base rate system was effective only from July 2010, it said.

From its low in March 2010, the RBI has raised the repo rate by a whopping 275 basis points or 2.75 percentage points to 7.5 per cent, which is still 150 bps below the 2008 peak of 9 per cent. However, lending rates, as proxied by SBI's prime lending rate, have risen by 225 bps to 14 per cent, surpassing its 2008 peak of 13.75 per cent, it noted.

"The improved transmission was a result of the rate hikes being complemented by tight money market liquidity. This raised banks' funding costs substantially, resulting in a faster increase in the lending rates. Arguments that real repo rates are still negative

in the country overlook this important fact," Varma pointed out.

To fight a wayward inflation, RBI has increased key policy rates - repo and reverse repo (short-term borrowing) rates from March 2010 to a record 10 times to 7.5 and 6.4 per cent respectively as the economy came of out the slump earlier than expected and inflation started going over the roof.

The provisional core inflation for May stood at an elevated 9.06 per cent, while food inflation was still high at 7.61 per cent for the week ended June 25.