The six-member Monetary Policy Committee (MPC), headed by Reserve Bank of India (RBI) Governor Urjit Patel, on October 4, 2016, unanimously voted to reduce the repo rate or the short-term rate at which the central bank lends to banks, by 0.25%, to 6.25% – the lowest since November 2010. All other rates – reverse repo rate, bank rate and marginal standing facility, stand reduced by similar percentage points to 5.75%, 6.75% and 6.75%, respectively.
Bankers, in a clear response to market expectations, have finally promised to swiftly pass on the 0.25% rate cut, effected by the Reserve Bank, to borrowers.
“For the busy season of the financial year, a cut in repo rate by 25 basis point is indeed a welcome sign. With MCLR already stabilised, the pass through of this cut is expected to be quite swift,” said Dena Bank CMD, Ashwani Kumar, who is also chairman of the Indian Banks’ Association.
Since January 2015, the RBI has reduced repo rates by 150 basis points, excluding the latest cut but banks have reduced their base rates by only 60 basis points. The RBI introduced the new marginal cost of funds-based lending rate (MCLR), since April this year. Between April and September 2016, RBI had cut the repo rate by 25 bps but the reduction in one year MCLR is only 15 basis points.
“I agree that the transmission through bank lending, has been less than anyone of us would have liked,” Patel had admitted, when asked whether banks will cut lending rates after the latest cut, which is the first in six months. “We are hoping that over the next quarter or two, keeping in mind that the government has also reduced the small savings rates, the MCLR itself will now throw up more transmission,” he added.
“With benign inflation trajectory going forward, the RBI’s policy stance is expected to remain accommodative. Banks will continue to transmit rates, based on evolving liquidity scenario,” SBI chairperson, Arundhati Bhattacharya said.
Credit for header image: http://bit.ly/2dU7EZg