RBI monetary policy review: Slower transmission by banks a hurdle for Raghuram Rajan

By: | Published: August 4, 2015 7:06 PM

Between January and July this year, while the central bank has reduced the repo rate by 75 basis points (bps), banks have reduced their base rate by only 30 bps.

RBIBetween January and July this year, while the central bank has reduced the repo rate by 75 basis points (bps), banks have reduced their base rate by only 30 bps. (PTI)

While RBI governor Raghuram G. Rajan has kept the repo rate unchanged at 7.25% in today’s monetary policy, he has once again raised concern of slower transmission of previous rate cuts by banks. Base rates of banks have hardly moved down since RBI’s last policy review in June.

In fact, between January and July this year, while the central bank has reduced the repo rate by 75 basis points (bps), banks have reduced their base rate by only 30 bps.

Moreover, the central bank has been actively managing liquidity at comfortable levels in the banking system, which has extended downward pressure on other market determined interest rates.

The only categories where rates have come down by over 75 bps are commercial papers and certificate of deposits. According to a Crisil note, only high rated corporates are able to benefit from lower borrowing costs in the corporate bond market and the lower rated entities and individual borrowers who rely heavily on the banking system have to still bear the brunt of muted transmission of RBI’s front-loaded rate reductions into bank lending rates.

Repo rate cut transmission to other lending rates

Basis points (bps) change/cut (January to July 2015)

repo-rate

* Average for 10 major banks

** Average of cross maturities

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