Home / Money / Personal-finance /  Significance of RBI’s 'neutral' policy stance

The Reserve Bank of India (RBI) kept the policy rates unchanged in its latest monetary policy review. However, RBI governor Urjit Patel said that there is still scope for the lending rates to come down because the policy rate has come down by 175 basis points (bps), while the weighted average lending rates have come down by 85-90 bps only. Though both the government and the apex bank are nudging the banking industry to reduce interest rates further, banks say it is unlikely that your home loan rates will reduce in the short term.

executive director, Axis Bank Ltd

Post-demonetization a huge amount of money has come into current and savings accounts. And as the process of withdrawals has played out, some of the money has gone out and new money has come into the system. Coupled with this, currently there is lack of change in policy rate but change in policy stance of the RBI. What is currently driving the interest rate is the easy liquidity situation, which we are seeing primarily through the process of demonetization. We have already seen lending rates come down quite sharply. I don’t think the situation changes in any manner in the short term, thanks to what has happened in the credit policy. Neither the borrowers nor the lenders should expect any big shift, either up or down, in the interest rates in the short term for the next 2-3 months. Now that we have the MCLR (Marginal Cost of Funds based Lending Rate) regime, as cost of funds comes down, the lending rates would come down sharply. One should also realize that when interest rates go up, lending rates will also go up. Therefore, transmission through MCLR and low-cost deposits that came into current and savings accounts, the transmission of lower lending rates has been fairly sharp. Lending rates are a function of cost of funds and as cost of funds comes down, lending rates will come down, as demonstrated by the banks.

president, consumer bkg, Kotak Mahindra Bank

Two changes that we have seen in February’s monetary policy are the shifts in stance from accommodative to neutral and the move to looking just at the CPI (consumer price index) to look at core inflation. Deposit rates have actually come down. If you remember 2 years ago, it was closer to 9% and now it is closer to 7%. In fact, many banks are offering marginally below 7% for 1-year fixed deposits. Over a 24-month period, we have seen a 200 basis point drop in deposit rates. It is unlikely to go down any further. In the Union Budget, the government has put in a special rate for senior citizen at 8%, up to a certain amount. For deposits, the rate that had impacted their savings will stop, I think. Depending on the way inflation and rates go, you could see an upward revision. Right now there will be more stability for the depositors and savers. As far as the borrowers are concerned, they have already seen a transmission with the drop in interest rates. If you look at what has happened in the last 2 months, during and post demonetization, banks transmitted significant reduction in interest rate for consumers—up to a 90 basis points. The transmission of rates to the borrowers has already happened. Given the current stance, it is unlikely to go down further from here. I see stability in lending and deposit rates for some time now.

RAJEEV AHUJA,head, strategy, retail & financial inclusion, RBL Bank Ltd

I think we have seen a significant amount of rate cut from the banks already, on the lending side. Banks have already front-loaded a lot of the rate cuts. All the banks have been cutting rates for the last 1 year. And, thus, there has been a significant drop in the lending rates. MCLR has dropped between 50 and 80 basis points. We are right now holding back. Clearly, there is a view by the MPC (Monetary Policy Committee) that it is a neutral zone. Considering the neutral policy stance, I don’t think much will change for either the borrowers or depositors for some time, until we see some cues one way or the other, from a macroeconomic point of view.

In case of deposits, we are already very competitively priced. In case of deposit rates, each bank takes a different stance. I think we are quite clear that for a lock-in period of over 1 year, the kind of rates we are offering will be compelling for the consumers. In the overall banking industry, I don’t think there will be a big drop or a big change for either deposits or lending rates. I think we are on a holding pattern on both sides and do not plan to change it for the next 3 months. Our fixed deposits rates will be higher than most of the larger banks. We are offering 7.75%, so it is 125 basis points higher. Deposit rate are very bank specific and are dependent on the liability structure.

Mumbai-based financial planner

The monetary policy anticipates a lower growth of 6.9% this financial year (FY) and 7.4% in FY2017-18. Inflation this year and the next year is expected to be 5% or less, which is largely a comfort zone for the RBI. The stance turning from accommodative to neutral indicates that the bank feels that the correct interest rate levels have been reached, from the policy perspective. It is leaning on the banks to lower the rates and ensure better transmission of RBI’s objective of lower interest rate in the system fuelling faster growth. RBI feels that the banks can lower the rates further, whereas bankers feel they have done enough. There is consternation among the public about deposit rates plummeting. This is especially heightened in the case of senior citizens, most of whom depend on fixed deposit (FD) interest. Some new banks may provide succor in the form of better FD rates. Borrowers can heave a sigh of relief as the interest rates are moving south. They need to be on floating rates to take advantage of interest rates moving any lower. It appears that the borrowing rate will remain low in the foreseeable future, making buying property on loan a less taxing proposition. The low interest rate can also fuel buying of white goods and autos in the coming months and years, which can give a boost to the economy.

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