Reserve Bank of India (RBI) Governor Shaktikanta Das along with his deputies.  (PTI)
Reserve Bank of India (RBI) Governor Shaktikanta Das along with his deputies. (PTI)

RBI hopeful of better transmission in the coming days

  • Shaktikanta Das has been aggressively pushing for transmission of rates and has held multiple meetings with banks on the issue
  • According to RBI, monetary transmission has been full and reasonably swift across various money market segments and the private corporate bond market

MUMBAI : Transmission of cuts in repo rates into lower bank lending rates is expected to improve going forward as floating rates come for renewal and the share of old base rate loans decline, said Reserve Bank of India’s (RBI) monetary policy committee (MPC) on Thursday.

The MPC said that after the introduction of the external benchmark system, most banks have linked their lending rates to the policy repo rate of the central bank. It said that the median term deposit rate has declined by 47 basis points (bps) during February-November 2019. Moreover, the weighted average term deposit rate declined by 9 bps in October as against a decline of just 7 bps in eight months during February-September.

“This augurs well for transmission to lending rates, going forward," the MPC said in its statement.

The credit market transmission remains delayed but is picking up, it said. According to RBI data, the 1-year median marginal cost of funds-based lending rate (MCLR) has declined 49 basis points and the weighted average lending rate (WALR) on fresh rupee loans sanctioned by banks declined by 44 basis points, while the WALR on outstanding rupee loans increased by 2 basis points during this period.

According to RBI, monetary transmission has been full and reasonably swift across various money market segments and the private corporate bond market. As against the cumulative reduction in the policy repo rate by 135 bps during February-October 2019, transmission to various money and corporate debt market segments ranged from 137 bps (overnight call money market) to 218 bps (3-month commercial papers of non-banking finance companies). Transmission to the government securities market, the MPC said, has been partial at 113 bps (5-year government securities) and 89 bps (10-year government securities).

Source: RBI
Source: RBI

“However, transmission is expected to improve going forward as the share of base rate loans, interest rates on which have remained sticky, declines and MCLR based floating rate loans, which typically have annual resets, become due for renewal," it said.

Shaktikanta Das, governor, RBI said at a press conference on Thursday that the full impact of RBI’s policy rate cuts is also playing out and is 44 basis points with regard to the new loans, as of now.

“We should give some time for the rate action which has been taken by RBI. We should allow some more time for greater reflection in the lending rates. So, we should also allow some more time for the combined impact of the measures undertaken by the government and the monetary easing undertaken consistently so far by RBI," said Das.

In an unexpected move, the Monetary Policy Committee of the Reserve Bank of India (RBI) hit pause on policy rate cuts, deciding to wait for past policy actions, undertaken by the government and the central bank, to play out.

Das said that there is a need to optimise the impact of RBI’s rate reductions. “The key consideration has to be the timing of further actions even as we monitor the impact of actions already taken so far. It is in this context that the MPC decided to pause for now and evaluate the developments with a readiness to act if the unfolding situation so warrants," said Das.

In September, the Reserve Bank of India (RBI) asked banks to link their lending rates on floating rate loans to retail, personal and micro, small and medium enterprises (MSME) borrowers to an external benchmark from 1 October.

To be sure, banks had started linking their lending rates to an external benchmark. Prior to this, banks mostly priced loans under the marginal cost of funds-based lending rate (MCLR).

The way banks set interest rates is critical for the smooth transmission of policy rates. To make this process transparent, RBI has over the years directed banks to price their loans against their benchmark prime lending rate (BPLR), base rate, and, finally, MCLR. Last year, though, was the first time that banks were asked to price their loans against an external benchmark.

Das has been aggressively pushing for transmission of rates and has held multiple meetings with banks on the issue. He has also expressed the need for better transmission in public forums. Even before RBI mandated external benchmarking of rates, the governor had hinted at it in August.

“The time has now come to formalize the linking of the lending rates on new loans to external benchmarks like the repo rate. We are monitoring the developments in this regard and whatever steps are required in the coming weeks will be taken by RBI," Das had said at a conclave organized by the Indian Banks’ Association and industry lobby group Ficci in August.

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