Benefits of repo rate cut to reach consumers faster this time; banks introduce new packages

Last month, the RBI made it mandatory for banks to link all new floating rate personal or retail loans and floating rate loans to MSMEs to an external benchmark like repo rate effective October 1, 2019

The cut in repo rate by the RBI is likely to benefit the bank customers faster as the majority of banks have already linked the retail loans and MSME products with the repo rate. The RBI yesterday cut the repo rate by 25 basis points, making it a fifth straight cut since February this year. The central bank has lowered the repo rate by 135 basis points so far this year and the market expectations show another rate cut in the December MPC meeting. The bankers expect that the cumulative reduction in repo rate delivered so far in 2019, along with the recent cut in corporate tax should help revive growth in the coming months.

“The banking sector, which has moved from MCLR to external benchmark loan rate, shall pass on the 25 bps reduction to the ultimate consumers faster than in the past,” Mrutyunjay Mahapatra, MD & CEO of Syndicate Bank told ENS Economic Bureau.

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The bankers believe that the rate cut along with the fiscal stimulus announced by the government can provide cushion to the sagging economy. V G Kannan, Chief Executive, Indian Banks Association, said that the monetary transmission could be swifter if banks could make similar changes in the deposits. He underlined that the system is adequately liquid, and RBI has given the assurance to maintain sufficient liquidity in the system.

With liquidity and improved domestic demand due to the measures proposed by the government, the banks could expect robust credit pick up in the second half of the fiscal, he added further. Last month, the RBI made it mandatory for banks to link all new floating rate personal or retail loans and floating rate loans to MSMEs to an external benchmark like repo rate effective October 1, 2019, which was aimed at transmitting more benefits of the central bank’s initiatives to reach the ground level.