Will banks pass on rate cut benefits to you?
The transmission of policy repo rate cuts to WALRs on fresh rupee loans of banks has improved marginally since the MPC last meeting, RBI saidRBI’s statement in June noted that a 0.5% cumulative cut in February and April resulted in only 0.21% average reduction in fresh rupee loans
Since February 2019, the Reserve Bank of India (RBI) has reduced the repo rate from 6.5% to 5.4%. However, transmission of rate cuts has been poor in the past. RBI’s statement in June noted that a 0.5% cumulative cut in February and April resulted in only 0.21% average reduction in fresh rupee loans. On past loans, the weighted average lending rate actually went up by 4 basis points or 0.04%.
In Wednesday’s monetary policy statement, RBI pointed towards more positive data. The transmission of policy repo rate cuts to weighted average lending rates (WALRs) on fresh rupee loans of banks has improved marginally since the monetary policy committee’s (MPC) last meeting, it said.
Overall, banks reduced their WALR on fresh rupee loans by 0.29% during the current easing phase so far (February-June 2019), the statement added.
Within hours of RBI’s decision, State Bank of India reduced its marginal cost of funds-based lending (MCLR) rate by 0.15% for all tenures. Bank lending rates, particularly for fresh loans, are linked to MCLR.
Experts, however, remained sceptical. “There are few specific actions to enhance transmission of policy rates to either the credit or bond markets except for the governor’s assurance that this will happen soon. Also, there was not much clarity on whether the current liquidity situation (characterized by large surplus liquidity) is likely to persist under the new liquidity framework that is due to be announced soon," said Abheek Barua, chief economist, HDFC Bank Ltd.
Anuj Puri, chairman, ANAROCK Property Consultants Pvt. Ltd, highlighted the potential of the rate cuts to stimulate borrowing in the affordable housing segment.
“While we won’t see a significant reduction in unsold inventory, affordable housing is another matter. The segment already has various incentives and being very cost-conscious, it may see a perceptible uptick. But, it all depends on how efficiently banks transmit this rate cut to actual consumers," he said. Improving transmission remains key to the success of the latest RBI rate cut.
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