The Reserve Bank of India’s declaration of the rate cut is like a wonderful “pre-Diwali” gift as the industry is anticipating some benefits to be given by the banks in order to boost the sentiments of the consumers in this festive season.
The Monetary Policy Committee (MPC) comprising of six members is headed by Reserve Bank of India (RBI) Governor Urjit Patel. This committee has unanimously voted to reduce the repo rate or the short-term rate at which the central bank lends to banks, by 0.25 percent, to 6.25 percent at their meeting on October 4, 2016. This rate is expected to be the lowest since November 2010. Not only that, even all other rates like reverse repo rate, bank rate, and marginal standing facility, have been reduced by similar percentage points to 5.75 percent, 6.75 percent, and 6.75 percent, respectively.
This news has raised the expectation of the customers. Therefore, in response to this decision by RBI, the banks have finally promised to swiftly pass on the 0.25 percent rate cut, as brought into effect by the Reserve Bank to the borrowers.
Dena Bank CMD, Ashwani Kumar, who is also chairman of the Indian Banks’ Association has pointed out that as MCLR has already been stabilised, the pass through of this cut is expected to be quite swift. He also added that this being festive season a cut in repo rate by 25 basis point is going to be an extremely welcome sign.
It should be noted that excluding the recent cut, the RBI has reduced repo rates by 150 basis points since January 2015. But on the other hand, banks have reduced their base rates by only 60 basis points. In fact, from April 2016, the RBI has also introduced the new marginal cost of funds-based lending rate (MCLR). Between April and September of this year, RBI had cut the repo rate by 25 bps but the reduction in one year MCLR is only 15 basis points.
It has been admitted by the banking heads that the transmission through bank lending, has been less than anyone would have expected. But fortunately, it is expected that the MCLR itself will now throw up more transmission, keeping in view the reduced the small savings rates by the government. And this change is supposed to be reflected in over the next quarter or two.
As benign inflation trajectory is going forward, it would be very helpful if the RBI’s policy stance remains accommodative in the near future. This will allow the banks to carry on with transmitting rates, based on evolving liquidity scenario. For more visit irxlive.com