RBI keeps key policy rate at 6% ‘Link lending rates to market benchmark’
NO CHANGE Says GST implementation impacted economic growth
where they are right now,” said Dharma Kirti Joshi, chief economist at rating company Crisil Ltd.
“RBI is assessing if the slowdown in growth is temporary or long-lasting. If there is more bad news on growth front and RBI’S inflation estimate is undershot, doors for rate cut could open up.”
The central bank cut its growth projections for gross value added, a measure of economic output, to 6.7% from 7.3% for the current financial year. It said that the implementation of the goods and services tax has had an adverse impact on economic growth. This may further delay the revival of investment activity, which is already hampered by stressed balance sheets of banks and companies, the monetary policy committee said in its resolution. Still, RBI governor Urjit Patel also pointed to a “possibility that the cyclical upturn will happen in the next two quarters.” He cited an improvement in high frequency economic indicators (such as auto sales or flight ticket purchases) and suggested that rates need not be cut at the moment.
That said, the RBI also reiterated the need to revive sluggish private sector investment. It listed several measures to boost growth such as building more infrastructure, restart stalled investment projects, simplify the GST and accelerate the rollout of the affordable housing programme. The central bank is worried about inflation accelerating.
The monetary policy panel listed several upside risks to inflation such as farm loan waivers, states’ implementation of pay commission allowances, and price revisions following GST and rising international crude prices. MUMBAI: A committee set up by the Reserve Bank of India (RBI) on Wednesday recommended linking bank lending rates to a market benchmark to hasten monetary policy transmission as well improve transparency in rate setting by lenders.
The committee headed by Janak Raj, principal adviser, monetary policy department, recommended that all floating rate loans advanced from April could be referenced to one of three external benchmarks.
The panel has suggested a riskfree curve involving rates on treasury bills, or certificate of deposits rates or the central bank’s policy repo rate.
The RBI will take a final view on the recommendations of the panel after taking into account the public feedback received until 25 October.
The panel pulled up banks for “arbitrariness” in calculating the base rate and marginal cost of funds-linked lending rates, two existing benchmarks to which retail lending rates such as car loan and home loan rates are fixed. The spreads charged over these internal benchmarks “has undermined the integrity of the interest setting process,” it said.
The panel has recommended that lending rates should be reset once every quarter from the current practise of once a year.
It also suggested that banks migrate all existing borrowers who are now charged under benchmark prime lending rates, base rates or the marginal cost of funds based lending rate (MCLR) to the external benchmarked rate without any conversion fee or other charges within one year of its introduction, i.e March 2019.
Introduced in April 2016, the MCLR system replaced the base rate regime. According to the panel, in the absence of any sunset clause on the base rate, banks were slow in migrating their existing customers to the MCLR regime.
It suggested that all existing borrowers under any other system be moved to MCLR.
Since April 2016 , the one-year MCLR has come down by 95 basis points (bps) whereas the repo rate is down by 75 bps, but MCLR has been mostly used for fresh loans. In some cases, banks’ spreads spread over the MCLR in the form of tenor and risk premium was different for customers in the same risk category, the panel noted.
The study noted that large reduction in MCLR was partly offset by some banks with a simultaneous increase in the spread in the form of business strategy premium, ostensibly to reduce the pass-through to lending rates.