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Transmission Of RBI’s Rate Cut A Bigger Challenge

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Transmission Of RBI’s Rate Cut A Bigger Challenge
Vishav - 06 June 2019

On June 6, 2019, the Reserve Bank of India (RBI) lowered its key lending rate for commercial banks for the third time this year by 25 basis points to 5.75% and changed the monetary policy stance from neutral to accommodative, industry observers welcomed the move but added that the transmission of the rate cut into the economy has emerged as a bigger challenge.

Deepthi Mathew, Economist, Geojit Financial Services, said it was not a surprising move as there was a lot of pressure on the central bank with the GDP growth registering one of the lowest rates in the last quarter of FY19. Whereas, Monish Anand, Shubh Loans Founder and CEO, stated that the earlier cuts in February and April of a total of 50 bps resulted in retail customers benefitting only by 10 basis points or so.

“It remains to be seen whether the reduction of repo rate by 25bps will trickle down to the actual borrowers,” said Anand.

Abhishek Bansal, Chairman, ABans Group of Companies, said while the banks are struggling with high NPAs, NBFCs are facing solvency issues, and hence have remained reluctant to pass on the benefits to the consumers despite the last two rate revisions.

“RBI has so far cumulatively reduced interest rates by 75 bps in 2019 to stimulate economic growth and make loans cheaper. However, floating rates are not linked to personal and retail loans, hence the benefits are not getting directly transferred to the end consumers. Home loans and Auto loans will become cheaper if the rate cut benefit is passed on to the consumers,” he said.

Meanwhile, RBI Governor Shaktikanta Das assured that the central bank would make sure that transmission of reduced repo rate would be faster and higher.

Fitch group firm India Ratings and Research (Ind-Ra) said the rate cut was unlikely to stimulate demand in the near term due to the absence of quick resonance in the financial market.

“Despite the RBI cutting policy rate by 50bps before this cut in 2019, banks have not adjusted their lending and deposit rates accordingly. On the contrary, a number of banks have raised their deposit rates to mobilise funds. At the core of this mismatch between the RBI’s action and the banks’ inability to pass on the benefit to the borrowers is the slowdown in household savings,” it said in a statement.

It added that more than the rate cut, it is the transmission of the rate cut into the economy that has emerged as a bigger challenge as the impact of the monetary policy on the Indian economy is felt with a significant lag.

Many industry experts welcomed the move despite the concerns of its benefits being passed on.

Ramesh Nair, CEO and Country Head, JLL India, said the change in policy stance to ‘accommodative’ was the much-needed measure to boost the economy. He further added,

“The monetary policy decision to cut the policy rate is laudable. As the residential sector is already at inflexion point signaling a sustainable recovery, this decision will support the trend. This repo rate cut is likely to have a direct impact on the real estate sector, provided the banks, in turn, transmit the same by a corresponding reduction in lending rates.”

Dr. Joseph Thomas, Head Researc, Emkay Wealth Management, said the repo rate cut of 0.25% and the change of stance from neutral to accommodative was key to supporting the sagging economic growth.

“The RBI policy announcement is exactly on the same lines as expected by most of the market participants. The projected growth has been lowered to 7%. The policy also has broad indications of more action on the liquidity front from the RBI in the coming days. This also confirms the commitment of the central bank to better transmission of the rate cut effects through liquidity,” he said.

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