Still room for banks to cut lending rates:

 RBI Governor In the minutes of the Monetary Policy Committee meeting, RBI Governor Urjit Patel said that for efficient monetary transmission, it is important that interest rates on small savings are not out of line with interest rates on other comparable instruments in the financial system. Banks still have scope to cut loan rates even though demonetisation has already helped faster monetary transmission into interest rates, said Reserve Bank of India Governor Urjit Patel. “Demonetisation-induced liquidity facilitated faster monetary transmission," Patel said in the minutes of the Monetary Policy Committee meeting that was held on April 5-6. "There is still room for banks to cut lending rates. For efficient transmission, it is important that interest rates on small savings are not out of line with interest rates on other comparable instruments in the financial system.” Since January 2015, the RBI has cut repo rate by 175 basis points (bps) while banks’ lending rates have declined by about half, especially on the base rate.

One bps is one-hundredth of a percentage point. Even as the policy rate remained unchanged since November 2016, the one-year median marginal cost of funds-based lending rate (MCLR) declined by a cumulative 70 bps since then. Base rate is the minimum loan rate offered before April 2016, while loans offered after that were linked to MCLR. Post-demonetisation (up to March 31, 2017), 27 public sector banks have reduced their one-year tenure MCLR in the range of 50 to 105 basis points, and 19 private sector banks have done so in the range of 25 to 148 bps, RBI said. Even as about 67 percent of banks’ loans are pegged at base rate, the pricing of interest rates on new home, auto and consumer loans are more or less inclined towards the one-year MCLR rates. In the fourth meeting of the Monetary Policy Committee (MPC), the policy repo rate (rate at which banks borrow from RBI) was kept unchanged at 6.25 percent. Releasing the minutes of the meeting on Thursday, 14 days after the policy announcement, the RBI statement said that all six members of the MPC voted in favour of the status quo of repo rate decision.

 All members pointed out that there were upside risks to inflation. The most important cost push will emanate from the 7th Pay Commission's house rent allowance and the second biggest cost would be one-time effect of GST (goods and services tax) which could impact inflation that could last for a year. Chaired by the RBI Governor the MPC meeting was attended by all six members including the government representatives Dr Chetan Ghate, Professor, Indian Statistical Institute; Dr Pami Dua, Director, Delhi School of Economics; and Dr Ravindra Dholakia, Professor, Indian Institute of Management, Ahmedabad and the RBI officials Dr Michael Debabrata Patra.

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