Context: The RBI Governor welcomed the latest move by banks to link fresh loans to repo rate which would enable faster transmission of interest rates.
Prelims: Economic and Social Development
Repo rate is the rate at which RBI lends to its clients generally against government securities. Reduction in repo rate helps the commercial banks to get money at a cheaper rate and an increase in repo rate discourages the commercial banks to get money as the rate increases and becomes expensive.
- A cut in repo rate implies that interest rates of banks will be reduced. But as the banks have discretion in this matter, an increase in repo rate is implemented immediately but not the cuts in repo rate.
- In its June 2019 monetary policy review, the RBI had cut the repo rate by 25 basis points (0.25 percent). Following the latest rate cut 0.35 bais point in August 2019), the cumulative back-to-back reduction in the repo rate this year has been to the tune of 110 basis points (1.1 percent), with the rate currently at 5.4 percent.
- However, the full benefit of these reductions has not been passed on to customers. For instance, at the June policy announcement, RBI Governor said that banks had passed on only 21 basis points (0.21 percent) of the cumulative 50 basis point (0.5 percent) rate cuts in February and April this year.
- Reports suggest that as on July 6, banks had lowered their benchmark lending rates, called MCLR, or marginal cost of funds-based lending rate, by just 10-20 basis points (0.1-0.2 percent).