RBIMovestoEn­sureBanks Pass on Rate Cuts, Quickly

The Economic Times - - Companies: Pursuit Of Profit -

Mumbai: Bor­row­ers could ex­pect in­ter­est rates to drop fur­ther af­ter the cen­tral bank on Wed­nes­day cut its bench­mark repo rate to the low­est since Novem­ber 2010. More im­por­tantly, the reg­u­la­tor ex­pressed un­hap­pi­ness over the trans­mis­sion of pre­vi­ous re­duc­tions in the cur­rent cy­cle of ra­teeas­ing, sig­nal­ing that high-street banks should bring down the cost of funds for con­sumers.

The Re­serve Bank of In­dia (RBI) said that mon­e­tary trans­mis­sion in the new lend­ing rate regime has been un­sat­is­fac­tory. Banks moved to a new mar­ginal cost of funds based lend­ing rate (MCLR) regime since April 2016 mainly be­cause the old base rate sys­tem was not as closely linked to de­posit rates. How­ever, on Wed­nes­day RBI said that the new sys­tem also needs a relook to im­prove pol­icy trans­mis- sion. It has con­sti­tuted an in­ter­nal group to study MCLR to im­prove mon­e­tary pol­icy trans­mis­sion, the cen­tral bank said in a state­ment af­ter the third bi-monthly mon­e­tary pol­icy re­view.


“Over­all rates will come down. We will ex­am­ine both the sav­ings rate and the lend­ing rate… This will give a boost to con­sump­tion,” said MD of Bank of In­dia D Mo­ha­p­a­tra. The RBI has re­duced its bench­mark repo rate by a to­tal of 200 ba­sis points, or 2 per­cent­age points, from its re­cent peak of 8% in Jan­uary 2014 as in­fla­tion eased. How­ever, lend­ing rate cuts by banks have not kept pace with the de­cline in pol­icy rates. “The ex­pe­ri­ence with the MCLR sys­tem in­tro­duced in April 2016 for im­prov­ing the mon­e­tary trans­mis­sion has not been en­tirely sat­is­fac­tory, even though it has been an ad­vance over the base rate sys­tem,” RBI said.

The study group will also ex­plore link­ing the bank lend­ing rates di­rectly to mar­ket de­ter mined bench­marks and will sub­mit its re­port by Septem­ber 24, RBI said. The cen­tral bank did not elab­o­rate on what ex­actly is the prob­lem with the cur­rent MCLR regime.


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