Raghuram Rajan also said that there is room for banks to pass on interest rate to customers.
The Reserve Bank of India (RBI) today said it will shortly announce methodology for determining the base rate taking into account the marginal cost of funds, a move aimed at ensuring that banks pass on policy rate cuts to borrowers.
“In the meantime, since the rate reduction cycle that commenced in January, less than half of the cumulative policy repo rate reduction of 125 basis points has been transmitted by banks. The median base lending rate has declined only by 60 basis point,” RBI said in its fifth bi-monthly monetary policy statement, 2015-16.
Base rate is the minimum benchmark rate below which a bank cannot lend.
“The Reserve Bank will shortly finalise the methodology for determining the base rate based on the marginal cost of funds, which all banks will move to,” it said.
As a result, RBI Governor Raghuram Rajan said, “banks will have to pay more attention to Asset Liability management… market will become more vibrant.”
Clearly, he said, banks have capability to switch to determining the base rate based on the marginal cost of funds.
The methodology will be announced later this week, he added.
Besides, the rate reduction on small savings like PPF and post office deposit is also going to bring down cost of fund for banks.
“The Government is examining linking small savings interest rates to market interest rates. These moves should further help transmission of policy rates into lending rates,” it said.
Rajan also said that there is room for banks to pass on interest rate to customers.