Monetary Policy: After Three Rate Cuts In 2019, Will Your EMIs Come Down?
The RBI has announced its third reduction in repo rate so far this year. Yet, interest rates haven’t changed much for borrowers.
The Reserve Bank of India on Thursday announced that the repo rate will be reduced by another 25 basis points, taking the benchmark rate to 5.75 percent.
Since January 2019, the central bank has announced three reductions in the repo rate, adding up to 75 basis points. But that hasn't translated into lending rate cuts, with interest rates not changing much for the average borrower.
According to monthly data released by the RBI, the weighted average lending rate for the entire banking system has come down to 9.76 percent in April compared with 9.97 percent in January. The weighted average lending rate for public-sector banks fell by 11 basis points in the same period to 9.36 percent, while private-sector banks reported a 32 basis points cut in their rates, which stood at 10.37 percent.
In May, large public banks saw their one-year marginal cost based lending rate inch up by a few basis points. The MCLR of large lenders like Bank of Baroda and Bank of India rose to 8.7 percent, from 8.65 percent in April, according to RBI data. In January, Bank of Baroda’s one-year MCLR was at 8.65 percent, while Bank of India was at 8.7 percent. India’s largest lender State Bank of India saw its one-year MCLR drop to 8.45 percent in May—a 10 bps fall since January.
While most private-sector banks maintained their MCLR in May, Axis Bank’s one-year rate dropped by 10 basis points to 8.8 percent.
Cumulatively, transmission of the 50 basis points in reduction of the policy repo rate in February and April 2019 was 21 basis points to the weighted average lending rate on fresh rupee loans, said the MPC in its resolution on Thursday. However, the WALR on outstanding rupee loans increased by 4 basis points as the past loans continue to be priced at high rates, the statement added.
When asked about the poor transmission of monetary policy, RBI Governor Shaktikanta Das said that lending rates should drop going forward.
“It's our expectation that as we go forward there will be higher transmission and then there will be faster transmission as well. This transmission will find its impact on individual consumer loans, consumer durable loans and two wheeler loans as well,” RBI Governor Shaktikanta Das said, while speaking to the press after the monetary policy announcement. “In these sectors there's a good chance that we will see impact so far as new loans are concerned.”
What’s Holding Up Transmission?
Tight liquidity in the banking system has held by transmission of lower rates.
A key reason behind this tight liquidity is weak deposit growth, which has remained below the pace at which credit is growing. This prevents banks from cutting their deposit rates.
The credit growth in the banking system has slowed to 12.6 percent year-on-year as on May 24. Deposit growth continues to lag credit growth at 10 percent year-on-year.
High small savings rates also act as a floor for deposit rates since banks compete with these schemes for deposits. In addition, market interest rates have also remained high due to tight system-wide liquidity. Bonds yields remained elevated for most of 2019 and have only now started to ease.
In the last few days, banking system liquidity has turned surplus as government spending has picked up and increased use of currency has normalised post-election. This should help bring down rates, said Keki Mistry, vice chairman and chief executive officer of HDFC Ltd.
When the earlier rate cuts were happening, the overall liquidity in the system was negative and because of negative liquidity, banks did not have the ability to cut the deposit rate...If the liquidity level in the system becomes high and there is enough liquidity in the system, that will give banks the ability to cut the deposit rates and therefore the lending rates.Keki Mistry, VC and CEO, HDFC Bank
Transmission also happens with a lag, said Governor Das while adding that it takes up to four months for complete transmission.
Bankers agree.
“It's difficult for banks to cut the deposit rates so sharply and so suddenly. It (the transmission) has to happen over the reprising of the fixed deposits,” Federal Bank’s Chief Financial Officer Ashutosh Khajuria told BloombergQuint. “Going forward, I expect another 15 to 20 basis points transmission happening immediately, and thereafter it would depend on the rigidity and the deposit structure,” Khajuria said.
The RBI had earlier proposed linking of lending rates with an external benchmark such as the repo rate or the treasury-bill rate. This proposal, however, has been put on hold for now.