RBI rate cut: Onus is now on banks to slash rates to spur economy

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Published: August 10, 2019 2:18:51 AM

The earlier RBI announcement to benchmark new floating rate loans to the external benchmarks appears to have been taken off the table.

RBI, RBI rate cut, Indian economy, Marginal Cost of Funds based Lending Rate, State Bank of IndiaBanks have not been able to reduce their lending because of slowing growth in deposits.

While the Reserve Bank of India has cut the repo rate by 35 basis points—the first cut of this magnitude—to 5.4% (the repo rate is now at a nine-year low), the onus is now on banks to cut their lending rates to spur economic activity. In response to the policy, the country’s largest lender, the State Bank of India, has reduced the Marginal Cost of Funds based Lending Rate (MCLR) across all tenors by 15 basis points.

Banks have been very slow in passing on the benefits of the central bank’s rate cuts to their customers. To be sure, before Wednesday’s rate cut, the central bank had cut the repo rate by 75 basis points this year between February and June. However, the transmission of policy rate cuts on fresh loans of banks was only 29bps.

RBI, RBI rate cut, Indian economy, Marginal Cost of Funds based Lending Rate, State Bank of India

The earlier RBI announcement to benchmark new floating rate loans to the external benchmarks appears to have been taken off the table.

RBI, RBI rate cut, Indian economy, Marginal Cost of Funds based Lending Rate, State Bank of India

Banks have not been able to reduce their lending because of slowing growth in deposits. As a result, deposit rates have remained flattish as banks have found it challenging to pass through rate-cuts, and small savings—given they are still offering much higher rates than bank deposits—are cornering growing shares of the deposit pie.

RBI, RBI rate cut, Indian economy, Marginal Cost of Funds based Lending Rate, State Bank of India

For example, while the five-year deposits rate of the SBI is 6.5%, the five-year post office term deposits fetch 7.7% and Public Provident Fund is fetching returns of 7.9%.

RBI, RBI rate cut, Indian economy, Marginal Cost of Funds based Lending Rate, State Bank of India

The central bank has injected liquidity, which means the supply-side is being taken care of, and has also made it easier for banks to lend to non-banks, and this should improve liquidity. Going forward, transmission should improve given surplus liquidity in the financial system.

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