RBI devises rules to ensure rate cut benefits passed on
The RBI on Thursday announced a new set of rules to calculate interest charges, a move aimed at prompting banks to fully pass on the central bank’s rate cuts to final consumers.
According to the new rules, effective from April 1 next year, banks will have to fix their “base rate”, the floor rate to which all lending rates are linked, on the “marginal cost” or the interest rate banks offer to new deposits.
This is different from the existing system where banks fix the base rate on the “average cost” that includes all existing borrowers. The RBI has cut its key lending rate by 1.25 percentage points since January. Ideally, the floating home loan rates should have come down by an identical margin. This hasn’t happened, with banks reducing their average lending rates by only 0.60 percentage points.
“Apart from helping to improve the transmission of policy rates into the lending rates of banks, these measures are expected to improve transparency in the methodology followed by banks for determining interest rates,” the RBI said in a statement.
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