Fallout of rate cuts

As expected, the Reserve Bank of India (RBI) cut repo rates by 25 basis points, the lowest in more than six and half years. In a falling interest rate scenario, this means even better news for customers as banks are likely to lower car and home loan interest rates. With the festive season also approaching, lenders will be coming up with promotional offers that will make loans more attractive to the customers.

Though lowering of interest rates follows an interest rate cut, it is yet to be seen how much benefits the banks pass on to their customers. The RBI has expressed displeasure with the benefits of previous rate cuts by the central bank not being passed on satisfactorily to the customer. The MCLR system, which is much more responsive to change in interest rates, was introduced in April 2016, but the monetary transmission has not been satisfactory. Monetary transmission refers to how the central bank’s monetary policy decisions are passed on for the benefit of financial markets and the end consumer.

“The central bank has met the broad stakeholder expectation on a rate cut of 25 basis points. It could have been bolder but possibly wants to see the level of transmission of this monetary policy action by the banks before indulging them with another policy rate cut,” says Ranen Banerjee, Partner - Public Finance and Economy, PwC India.

With inflation easing, RBI has been lowering its policy rates over the last few years. In January 2014, it was at a high of 8 per cent and since then it has been lowered by 200 basis points and even though banks have cut rates, they have not kept pace with the lowering of policy rates.

Keeping this in mind, the RBI has constituted an internal group to study the MCLR regime and also explore if the linking of the bank lending rates could be made direct to market-determined benchmarks’ going ahead. The group will submit its report by September 24, 2017.