The Reserve Bank of India (RBI) has cut the repo rate by a further 25 bps to 6.5 per cent and have taken measures to ease the liquidity constraints in the banking system. This is expected to provide impetus for the industry and giving hopes to the consumers that interest rates in the economy will fall faster than earlier. The base rate pass-through of the previous 125 bps in rate cuts was only 60-70 bps. The economists agree that the move will provide more 'durable liquidity', eliminating banks' chances of complaint.
Indian Bankers and economists, all agree rates will soften, though the quantum would depend on banks' asset-liability profile. The new marginal cost-based lending rate (MCLR), lenders will have to cut their rates. "The transmission of (reduced) policy rates will entirely depend on how fast banks can adjust their deposit rates (DRs), which will subsequently lead to change in MCLR," says State Bank of India chief economist Soumya Kanti Ghosh.
Last year also, the RBI had cut its repo rate by 125 basis points, but banks, complaining of tight cash conditions, have only lowered their lending. The RBI governor had earlier chastised banks for not passing on rate cuts. Banks had said the liquidity provided by RBI was too short-term and small savings rates were much higher than those for bank deposits.
"We have now given them (banks) more liquidity, so transmission should take place," Rajan said, adding "there will be no uncertainty about liquidity now".