Home >Market >Mark-to-market >Monetary transmission: It’s more than just a cut in repo rates

Reserve Bank of India (RBI) governor Raghuram Rajan may or may not reduce the repo rate on Tuesday, but he has been consistently urging banks to pass on the benefits of lower interest rates to customers. Rajan has reduced the repo rate by 150 basis points (bps) since January last year. Have banks followed or is there more room left? Recall that the shift to marginal costs for determining base rates and the lowering of interest rates on small savings were expected to aid the transmission of lower rates by banks.

Now, see the chart of weighted average lending rates on fresh rupee loans from the Centre for Monitoring Indian Economy (CMIE), juxtaposed against the repo rate. Between January 2015 and March 2016, the repo rate was cut 125 bps from 8% to 6.75%. However, the cut in the weighted average lending rate by all scheduled commercial banks (SCBs) between December 2014 and today has been slightly less than 100 bps. Private banks have lowered their lending rates the most.

There is some more scope for banks to pass on the benefits of lower interest rates to customers, said Siddharth Purohit, an analyst at Angel Broking Pvt. Ltd. However, for public sector lenders, the rate of deposit growth has been subdued; so, they are struggling on that front. Private lenders, on the other hand, have recorded a decent deposit growth rate, which has helped their transmission, he explained.

In any case, a 100% transmission of rates by banks is not possible and RBI is aware of this fact. As of now, banks have done much on this front, said Asutosh Kumar Mishra, an analyst with Reliance Securities Ltd. According to him, going ahead, whether or not more transmission will happen by banks depends upon liquidity conditions during the next few months as FCNR (Foreign Currency Non-Resident) deposit redemptions will take place in the latter part of this fiscal year.

Public lenders are laden with bad debts and the pain is likely to continue for some more time. Not only interest rates, but the overall credit environment has to be better for banks to transmit more, said D.R. Dogra, chief executive of CARE Ratings. “If you look at CARE Debt Quality Index, it has been moving down continuously over the last few years, indicating thereby that there is little improvement in the credit environment," he added.

Subscribe to Mint Newsletters
* Enter a valid email
* Thank you for subscribing to our newsletter.

Click here to read the Mint ePaperMint is now on Telegram. Join Mint channel in your Telegram and stay updated with the latest business news.

Edit Profile
My ReadsRedeem a Gift CardLogout