Mumbai: The Reserve Bank of India cut the repo rate by 25 bps. However, the past two rate cuts have seen little transmission. The RBI’s statement noted that the 0.5% cumulative cut in February and April resulted in only 0.21% average reduction on fresh rupee loans. On past loans, the weighted average lending rate actually went up by 4 bps (0.04%). Gaurav Gupta, chief executive officer, Myloancare, attributed the faulty transmission to the ongoing crisis in non banking finance companies and housing finance companies and its impact on debt markets. But with total 75 bps cut this year, there may be better chances of rate transmission. Rajiv Anand, executive director-wholesale banking, Axis Bank, pointed to improved liquidity in the system which has gone from deficit to surplus as a factor in favour of rate cut transmission. Existing borrowers, who see this as a positive development and an opportunity to shift to a cheaper loan, should do a cost-benefit analysis before switching. Make sure that what you save in the first year after the switch through lower EMIs is more than the cost of switch.

NEFT and RTGS charges

While the rate cut transmission may take some time to play out, what should bring cheer to the customers is RBI’s decision to waive charges related to NEFT and RTGS (for money transfers) that it levies on banks and ensure that the cuts are passed on to customers. This is part of its overall push to increase electronic payments.

The RBI also proposed to constitute a committee to examine ATM charges and fees given the growing usage. The Committee is expected to submit its recommendations within two months of its first meeting and the RBI will announce the composition of the committee in a week’s time.

Forex trading platform

The RBI announced that a platform for buying foreign exchange at market prices for individuals and small and medium enterprises (SMEs) is being tested by users. It expects the platform to be operational from August 2019. At present, both the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) offer forex derivatives in which retail investors can participate. However, ‘spot’ purchases of foreign exchange are not easily facilitated on exchanges. Retail buyers mostly rely on banks and foreign exchange dealers and pay hefty spreads on their forex transactions. A spread is the difference between the buying and selling rate of foreign exchange. “Though the modalities of this are yet to be known, it is a good measure to reduce costs for small businesses and individual users. However, the charges levied by the banks who will facilitate such trades will have to be competitive. The success of this platform will depend on the active participation from authorised dealers (including banks). One will have to wait and see as to how soon the platform is able to offer the required depth and liquidity," said Dhiraj Relli, managing director and chief executive officer, HDFC Securities.

State development loans

At present, retail investors are able to invest in Government of India securities as part of RBI’s attempt to deepen the government bond market. Brokers such as Zerodha already offer this facility. The RBI proposed to extend this facility to state development loans (SDL), effectively the bonds of Indian states. Such SDLs can carry a slightly higher yield than government of India bonds and have extremely low risk. Wealth managers took a cautious stance on the proposal. “Getting individual investors to invest directly in bonds has been a challenge for a long time. Even after government of India bonds were made available to individuals, investment has not picked up much. SDLs are a good option for HNIs who are willing to buy and hold the bonds to maturity and do not want much credit risk," said Abhijit Bhave, chief executive officer, Karvy Private Wealth.

RBI has changed its stance from neutral to accommodative and this may imply additional rate cuts in the next few quarters. This is a net positive for borrowers but a lot depends on transmission of rate cuts in the coming months. However, for retail investors, the real icing on the cake is the RBI’s proposals with regard to forex purchases, currency transfer charges, investment in state government debt and ATM charges. If they work well, they should ultimately put more money in investors’ pockets