LOWER EMIs LIKELY AS RBI CUTS KEY RATE

Mumbai, Aug. 2: The Reserve Bank on Wednesday cut its key lending rate by 0.25 per cent — first time in 10 months — to about 7-year low of 6 per cent. However, a cut in loan rates for home and auto may take time as banks need to initially slash the deposit rates.

Citing record low inflation and retaining its neutral policy stance, the RBI reduced the benchmark repurchase rate, at which it lends to banks, from 6.25 per cent to 6 per cent.

The Reserve Bank has constituted an internal study group to suggest measures to improve the monetary transmission and further explore the possibility of linking the bank lending rates directly to market determined benchmarks.

RBI said that the marginal cost of funds based lending rate (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 earlier base rate system.

“An internal study group has been constituted by the Reserve Bank to study the various aspects of the MCLR system from the perspective of improving the monetary transmission and exploring linking of the bank lending rates directly to market determined benchmarks,” it said.

The group will submit the report by September 24. According to the RBI, a quick scrutiny of the base rate of some banks post the introduction of MCLR suggests that it has moved significantly less than MCLR. While the extent of change in base rate may not necessarily mirror the revision in MCLR, RBI said, the rigidity of base rate is a matter of concern for an efficient transmission of monetary policy to the real economy. “Given a large part of the floating rate loan portfolio of banks is still anchored on the base rate, the RBI will be exploring various options in the near future to make the base rate more responsive to changes in cost of funds of banks,” it said.