RBI rate cut: Don’t cheer yet, key challenge is to make money available to borrowers at lower rate

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Published: June 6, 2019 4:23:02 PM

While rates on longer tenor money market instruments came down, the rate on outstanding rupee loans rose as the past loans continue to be priced at high rates, the central bank also said.

The banks have lowered lending rates or marginal cost of funds based lending rate (MCLR) by just 5-10 bps since January.

Even as the RBI is lately on a rate cutting spree, the banks have not completely transmitted the cut into the economy. The disappointment was once again made public by the committee Thursday saying that the weighted average lending rate (WALR) has come down just 0.21 per cent, while the same for older loans has surged 0.04 per cent, as against policy rate cuts of 0.50 percentage point so far. The cuts add up to 0.75 per centage point, taking June rate cut into account. “Transmission  of the cumulative reduction of 50 bps in the policy repo rate in February and April 2019 was 21 bps to the weighted average lending rate (WALR) on fresh rupee loans,” the RBI said in the statement. While rates on longer tenor money market instruments came down, the rate on outstanding rupee loans rose as the past loans continue to be priced at high rates, the central bank also said.

The banks have lowered lending rates or marginal cost of funds based lending rate (MCLR) by just 5-10 bps since January, even as the RBI cut the policy repo rate by 50 bps. Interestingly, a few of the public sector lenders including Canara Bank, Bank of India (BoI) and Bank of Baroda have actually increased their lending rates since April rate cut. The RBI has even asked the lenders to link their interest rates to external benchmarks instead of MCLR for transmission of monetary policy rates. However, it’s still a work in progress.

Also read: RBI Monetary Policy HIGHLIGHTS: Repo rate cut to 9-year low as demand slowdown, liquidity woes weigh

Several analysts are of the view that the measures taken by the RBI to infuse liquidity to lenders in general and NBFCs in particular would help in tackling economic slowdown. “The banking system was going through a liquidity deficit so far, but now after the RBI has assured them of infusing enough liquidity and even taken measures such as rate cuts and OMOs in the past quarter transmission shouldn’t remain a problem anymore. The RBI has clearly assured the lenders that it would take care of their deposit rate concerns and this in itself solves the problem. We would see better rate pass-on in the coming days,” Sameer Narang, Chief Economist, Bank of Baroda told Financial Express Online.

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