Govt keeps eye on rate transmission

New Delhi: The government is closely monitoring lenders to ensure they pass on rate cuts announced by the central bank. A senior government official said they will hold discussions with banks if such transmission is not reflected in the next few 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 said.

The Reserve Bank of India (RBI) last week announced a quarter-percentage-point rate cut, the first in five years, which may lead to interest rates on home loans and other borrowings coming down.

The Monetary Policy Committee (MPC) under new governor Sanjay Malhotra cut the repo rate to 6.25%.

“The MPC remains unambiguously focused on a durable alignment of inflation with the target while supporting growth,” Malhotra said.

In 2019, the RBI had to hold a meeting with banks, as after a quarter-percentage-point, or 25-basis-point, rate cut by the central bank, most lenders only transmitted around 5 bps. The then RBI governor, Shaktikanta Das, had said that the transmission of rates was very important, especially after the central bank announced a rate cut, and that they would discuss this issue with the banks and see what needed to be done.

Earlier too, the central bank has cited lack of adequate monetary transmission as a key policy concern, observing that it blunts the impact of its policy changes on economic activity and inflation.

According to a research report by Emkay Global Financial Services, while the system liquidity deficit has come down to ₹70,000 crore now, it “will turn ugly” to a deficit of over ₹2.5 lakh crore by the end of March without any additional liquidity 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 report stated that the repo rate cut will hurt margins (5-12 bps) for banks with a relatively higher share of floating or repo-linked loans.