RBIMovestoEnsureBanks Pass on Rate Cuts, Quickly
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.