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RBI cuts repo rate, CRR by 25 basis points in its Q3 review of monetary policy

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RBI cuts repo rate, CRR by 25 basis points in its Q3 review of monetary policy

Last updated: February 13 2018
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  • RBI cuts repo rate, CRR by 25 basis points in its Q3 review of monetary policy

    Hi,

    Does this mean Rate of Interest for existing home loan borrowers will go down by 0.25 % ?
  • #2

    #2

    Re : RBI cuts repo rate, CRR by 25 basis points in its Q3 review of monetary policy

    Repo rate cut means now banks/financial institutions will be able to lend short term money at less interest from RBI. CRR reduction means that RBI is injecting the money in the market and this will make more supply leading to reduction in the lending rates as more money will be availble with banks to lend.
    This is to fuel the economic growth and reduce the affect of the reducing GDP.

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    • #3

      #3

      Re : RBI cuts repo rate, CRR by 25 basis points in its Q3 review of monetary policy

      Originally posted by prasky View Post
      Hi,

      Does this mean Rate of Interest for existing home loan borrowers will go down by 0.25 % ?
      It means that the borrowing rates for banks got cheaper by 0.25% and that the RBI has infused liquidity into the system. The home loan borrowers stand to benefit only when the banks pass on this benefit to the customers. Banks can either reduce the margin over base rate (benefiting new customers only) or reduce the base rate itself (which benefits all customers equally).

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      • #4

        #4

        Re : RBI cuts repo rate, CRR by 25 basis points in its Q3 review of monetary policy

        Why Rate Cuts By RBI Benefit You Too Little, Too Late

        Those who keep a keen eye on the Reserve Bank of India’s monetary policy review after taking a home loan expecting a reduction in interest rate get a reason to cheer once in a while. However, the chances of this initial cheer turning into a real happiness are often sleek. Despite all the persuasion and nudging by the banking regulator, banks remain quite unwilling to pass on the benefits monetary to borrowers. If the RBI is lending banks at an interest of six per cent currently, you as a borrower still have to pay at least 8.30 per cent when you apply for a home loan. The calculations done in-between enormously increase the cost of a home loan for a common man.

        It is not for the lack of efforts on the RBI’s part, though, that monetary transmission in Indian’s banking system does not take place. Several changes made by the central bank in the past 20 years have primarily been aimed at benefitting the borrowers. However, that target is far from achieved.

        In 1994, it introduced the prime lending rate system. When that regime failed to solve the purpose, the Benchmark Prime Lending Rate (BPLR) system was introduced in 2003. Since both PLR and BPLR “did not produce adequate monetary transmission to the real economy”, the RBI in 2010 replaced the BPLR system with the base-rate system. That did not do the job either, the marginal cost of funds-based lending rate (MCLR) was introduced in April 2016. The MCLR system, says the RBI, has continued to suffer from the same flaw, owing to which “overall lending rates have remained high in spite of the monetary policy being accommodative since January 2015”.

        This prompted the banking regulator to set an internal study group to “review the working of the MCLR system”.

        The group gave its report in October last year, and suggested banks linked the MCLR with either of the three external benchmarks ─ the treasury bill rate, the CD rate and the Reserve Bank’s policy repo rate ─ to ensure better transmission.
        In what could certainly be termed as a rare display of internal workings, the RBI recently made public the feedback it received from banks and other stakeholders on the proposal. Banks certainly are not pleased by the above mentioned proposal.

        “The Indian Banks’ Association and banks, in general, have expressed that the MCLR system is working well, and it should continue. All banks, barring some foreign ones, are of the view that none of the three external benchmarks recommended by the study group can be adopted in the near- to medium-run, since banks’ funding cost is not related directly to any of the proposed external benchmarks,” the RBI addendum read.

        When banks reset your loans more frequently, you are more likely to benefit as a borrower. Keeping that in mind, it was suggested financial institutions reset the loans on a quarterly basis rather than on an annual basis which is a cocoon practice now.

        Banks are of the view the reset period for computation of MCLR cannot be fixed on a quarterly basis always. Even if an external benchmark was adopted, the reset period should be linked to the tenor of the underlying external benchmark, they have suggested.

        The huge difference between the rate at which banks borrow from the RBI and the rate at which a common man borrows from the banks is caused because spread is at play. Banks are also unwilling to turn loose here, at all.

        “According to banks, with the switchover to an external benchmark, the spread decisions may get even more complex, because of the uncertainty about managing interest rate risk, which may partly influence spreads,” the RBI said.

        In short, banks are all for the MCLR regime and want to wait, watch and see its impact playing out. “One and a half years, according to banks, is too short a period to assess the effectiveness of a new regime, given the normal lags in transmission.” It is worth mentioning here that despite the banking regulator passing several directives in this regard, a large part of the borrowers who took home loans before April 2016 have their loans linked to the base rate system.

        Those who took loans before the base rate regime became effective also have their debt linked to the BPLR system.

        The RBI also noted it might have to resort to stricter means to do what was attempting to do.

        “If policy rate changes by the Reserve Bank are not fully transmitted to the real economy, the Reserve Bank may have to resort to changes larger than otherwise necessary to achieve the mandated objective. This, in turn, could have ramifications for financial market segments that are sensitive to interest rates, such as G-sec market in which banks are major participants,” it said at the end of the appendum.

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