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Transmission is key, RBI puts faith in banks

Shritama Bose
RBI monetary policy, Rate cut, policy repo rate, Global growth, BCBS, inflation, global economic indicators, India’s banking sector

The Reserve Bank of India has done its bit to revive a flagging economy by cutting the repo rate by a cumulative 110 basis points (bps) in 2019. However, the benefit of these rate cuts have not flowed through as banks have not passed on the rate cuts. As a result, transmission of monetary policy continues to be a sticky issue between banks and the regulator.

Despite a 75 bps cut in the repo rate between February and June, banks have reduced their weighted average lending rates (WALR) on fresh rupee loans by a mere 29 bps during the same period, RBI governor Shaktikanta Das said on Wednesday.

“These policy impulses (rate cuts and the accommodative stance of monetary policy) have been transmitted through financial markets fully. The weighted average call money rate (WACR) has declined by 78 bps, market repo rate by 73 bps and 10-year benchmark G-Sec yield by 102 bps,” Das explained. “Banks, on the other hand, have reduced their interest rates on fresh rupee loans by 29 basis points so far (February-June 2019). Our interactions with various stakeholders, including both public sector and private sector banks, indicate that steps are being taken by them on an ongoing basis to progressively lower their interest rates so that benefits of the policy rate reductions are passed on to the economy.” Accordingly, the RBI expects higher transmission of monetary policy actions and stance by the banks in the weeks and months ahead, he added.

Das was, however, non-committal on the matter of a transition to external benchmark-linked lending rates and effectively ruled out the possibility of making such a transition. State Bank of India (SBI), which moved to slash marginal cost of funds-based lending rates (MCLRs) by 15 bps across tenures soon after the central bank’s Wednesday rate action, believes rates in the system are high partly because of high deposit rates being offered by private banks. Rajnish Kumar, chairman, SBI, told a television channel, “All the banks will have to take note of this fact (of rates falling) and they cannot keep rates of interest artificially high. We have a lot of excess SLR still sitting with us and my CD (credit deposit) ratio is still at 69%. So I have a lot of headroom available to take it to 75% without sacrificing our net interest margin.”

Some experts say the policy statement and commentary led to some disappointment on actual measures to tackle the pace of transmission. Abheek Barua, chief economist atHDFC Bank, said: “...there was not much clarity either on whether the current liquidity situation is likely to persist under the new liquidity framework that is due to be announced soon...”