The Reserve Bank of India will nudge bank CEOs to pass on the benefit of lower policy rates like it did after the previous policy, because the lenders have not been always proactive in transmitting the central bank’s policy actions without verbal persuasion.
“It has been decided to hold further consultations with stakeholders and work out an effective mechanism for transmission of rates,” RBI governor Shaktikanta Das said on Thursday after announcing a 25 basis point cut in repo rate for the second time this calendar.
“We are conscious of the fact that there has to be effective and appropriate transmission of the rates,” Das said in post-policy media interaction. “After the last meeting, I had held meetings with public sector and private sector banks. The banks have cut MCLR by up to 10 basis points. But more needs to be done.”
No bank had lowered marginal cost-based lending rate (MCLR) after the previous repo rate cut in February before RBI brass persuaded banks to do so. State Bank of IndiaNSE -1.48 % had made a token 5 basis point home loan rate cut, but it kept the benchmark MCLR intact. Many experts have raised doubts over the effectiveness of repo rate as a monetary policy tool. “We believe that despite an additional cut in policy rates, the transmission in banks’ lending rate will remain incomplete as the incremental build-up in their deposits continues to lag the credit growth and the interest rates on small savings continue at elevated levels,” said Anil Gupta, ICRA’s sector head for financial sector ratings. Doubts have also been cast on whether banks would be able to lower rates as they have actually frontloaded the lending rate cuts following RBI’s persuasion, anticipating lower deposit rates in the first quarter when credit demand typically remains tepid. “No substantial relief is expected for borrowers in their monthly loan instalments as banks are unlikely to induce a large cut in their benchmark lending rates,” Gupta said.
Stakeholders believe that it’s the liquidity that holds the key for effective monetary transmission. “What concerned us more is addressing the liquidity tightness in the system, wherein the real problem lies,” said Amar Ambani, head of research at YES Securities. “The questions to the governor in the post policy interactions also circled around liquidity deficit and lack of transmission of rate cuts.” Das said it is a question of deciding on the quantum of rate cut based on your assumption of what is the right call at that particular point of time. Assuming there is space, there are upsides and downsides and based on that a considered call has to be taken, the RBI governor said.
He said the central bank had taken several measures to enable better management of interest rate risk by banks – for instance, by allowing non-residents to participate in the rupee interest rate swap market.