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Reduction in policy rates will give relief to the common man
Four of the six members of the Monetary Policy Committee (MPC) voted in favour of a 25 basis point cut in the repo rate, while two members opposed it. After the cut, the repo rate fell to 6 per cent.

It is worth mentioning that in the previous monetary review too, the repo rate was cut by 0.25 per cent. It shows that the Reserve Bank of India (RBI) wants to increase the pace of development.

RBI data shows that the speed of borrowing in the country is faster than the deposit. Because of this, the banks are offering higher interest on deposits, so that they can remain competitive. It reduces the ability of the banks to give benefits to the borrowers. At present, the dependence of commercial banks on big size of deposits is increasing, thereby mounting the cost of their funds.

Banks are also using deposits to gain market share. In such circumstances, the possibility of giving benefits of reduction of policy rates to customers is less, but the Governor of the RBI, Shakti Kant Das has been constantly trying to improve the liquidity position in the banks. Das opines that adjustment in SLR, purchase of bonds and cash inflows from dollar swaps will encourage the banks to reduce their loan rates.

Bankers say that due to the marginal cost-based borrowing rate (MCLR) system, the fund cost of the banks has increased. In such a situation, it is not easy for small banks to give immediate benefit of the policy rate cut to customers. After announcing the monetary policy of the RBI, there has been an increase in bond yield, which will be reflected in the MCLR calculation of banks and if the returns remain at a higher level, then it can be difficult to give the benefit of the policy rate cut to the customers. In such an environment, the RBI needs to cut policy rates at least once more.

After merger of Vijaya Bank and Dena Bank with Bank of Baroda, the government is also planning to merger of remaining public sector banks (PSUs) for reducing the capital problem of the PSUs. Being a larger bank, the State Bank of India (SBI) has declared interest rate reduction by 25 basis points on cash credit and overdraft with a limit of more than Rs.1 lakh. These rates will be effective from 1st May, 2019. Along with this, SBI has also reduced the interest rate on savings accounts from 3.50 per cent to 3.25 per cent.

According to Das, it is more important to give the benefit of reduction in policy rates to customers; otherwise the purpose of deduction in policy rate will be futile exercise. In the policy review, the RBI has cut policy rate 0.25 basis points, but except a few banks, others have not shown interest in reducing their MCLR, whereas there is a need to cut their loan rates with immediate effect.

RBI wants floating rates to be linked to the external benchmark, which can be given to the bank borrowers of real benefits of reduction in policy rates. Presently, the benefits of reduction of borrowing rates are being partly given by commercial banks or there is a delay in giving it. For example, in February, 2019, after the reduction of 25 basis points in the repo rate, the new lending of rupees was reduced by only 12 basis points during February, 2019. Interestingly, these benefits gave by only a few banks.

The Circular of the February 12 issued by the RBI has been cancelled by the Supreme Court on April 2, 2019. It is believed that this decision of the Supreme Court will reduce the non-performing assets (NPAs) and will also accelerate the settlement process. Bank's loans taken by the electricity, textiles and cement sectors had badly been affected by this circular. It is noteworthy that the banks have a balance of Rs 2.2 lakh crore on 34 power companies, which illustrates how much Supreme Court decision is important for these sectors. 

It can be said that the RBI's efforts and the latest decision of the Supreme Court will benefit the borrowers, banks and companies associated to electricity, textiles and cement sectors.

About the Author: Satish Singh is currently working as Chief Manager in State Bank of India's Economic Research Department, Corporate Centre, Mumbai, and has been writing mainly on financial and banking topics for the last 10 years.

Editorial NOTE: This article is categorized under Opinion Section. The views expressed in this article are solely those of the author and do not necessarily represent the views of In case you have a opposing view, please click here to share the same in the comments section.
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