Loan EMIs: After RBI MPC’s decision to cut repo rate, government officials are actively keeping an eye on banks and lenders to ensure rate reductions announced by the central bank are properly transmitted to customers. A high-ranking government official indicated they will engage with banks if the rate cut transmission is not evident in the coming weeks.
“There is no stipulated timeline. Each bank’s asset-liability committee will take a call, but it should not be the case that there is no, or very marginal, benefit passed on,” he told ET.
The RBI announced a 0.25 percentage point repo rate reduction last week, the first such decrease in five years, potentially leading to lower interest rates on housing loans and other credit facilities.
Under new RBI governor Sanjay Malhotra, the MPC reduced the repo rate to 6.25%.
RBI repo rate cut
“The MPC remains unambiguously focused on a durable alignment of inflation with the target while supporting growth,” Malhotra said.
In 2019, following a 25-basis-point reduction by the central bank, most banks only passed on about 5 basis points, necessitating a meeting between the RBI and banking institutions.
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The previous RBI governor, Shaktikanta Das, had then emphasised the significance of rate transmission post rate cuts and indicated plans to discuss necessary measures with banks.
Previously, the central bank highlighted insufficient monetary transmission as a crucial policy issue, noting its impact on limiting policy effectiveness regarding economic activity and inflation.
An Emkay Global Financial Services analysis indicates that whilst the system liquidity deficit has reduced to ₹70,000 crore presently, it “will turn ugly” reaching beyond ₹2.5 lakh crore by March-end without additional measures.
“This implies that more measures are on the anvil if the RBI finds this level of deficit uncomfortable for policy transmission, especially as the depth of the cut cycle is still arguable,” it noted. The analysis suggests the repo rate reduction will affect margins (5-12 bps) for banks with higher floating or repo-linked loan portfolios.