Das, Auto News, ET Auto
New Delhi: Since the start of the key rate cuts in February 2019, which accelerated after the start of the pandemic, new and old borrowers have benefited from the transmission of monetary policy to the tune of 217 bps and 170 bps respectively , Governor of the Shaktikanta Das Reserve Bank said on Friday. Policy transmission is central bank terminology for banks passing on the benefits of rate cuts by lowering their lending and deposit rates for new and old borrowers, which, however, is still titled in favor of new borrowers.
Between February 2019, which was Das’ first policy announcement when he cut the repo rate from a modest 25 basis points (bps) to 6.25 percent, and July 2021, the central bank cut the policy interest rate or the repo rate from 250 basis points to 4 percent, Das told reporters at the usual post-policy press conference.
His predecessor Urjit Patel had left the interest rate at 6.5% in the December 2018 policy after he started raising rates early in his RBI days.
Das began the rate-cutting cycle in February 2019. On May 22, 2020, in an unscheduled announcement, the RBI cut the repo rate by 40 basis points to help support the economy amid the COVID-19 crisis.
Das previously cut the rate by 75 basis points on March 27, 2020 during the first monetary policy meeting since the start of the pandemic.
The governor said the RBI has been closely monitoring the pace of policy transmission, particularly since October 2019, when it mandated all banks to establish an external benchmark for the cost of their funds and the pricing of their loans.
Between February 2019 and July 2021, new and existing borrowers saw their interest charges drop by 217 basis points and 170 basis points respectively, while the RBI cut the repo rate by 250 basis points, he said, adding that there had been a tangible transmission of rate cuts.
However, the governor was quick to add that existing borrowers are not getting all of the benefits new borrowers receive due to the reset clause in their loan agreements.
Das further said that during the pandemic period between March 2020 and July 2021, the pass-through for new loans was 146 basis points, while the same for existing loans was 101 basis points.
So there has been pass-through, he said, and pointed out that even for many existing mortgage borrowers, rates are at historically low levels.
Since the introduction of external benchmarking, the transmission has been good for new and old loans, because since October 2019, the rates for new loans are down by 177 basis points, and the same is true for the old loans by 119 basis points, Das said.
As part of the external benchmarking of lending rates, banks can choose between the repo rate, the yield on three- or six-month Treasury bills, or any other benchmark rate published by Financial Benchmarks India Ltd to link the variable rate loans.
According to RBI, as of October 1, 2019, of the 62 banks from which information was collected, 36 adopted the key repo rate as an external benchmark.
Successive governors, starting with Dr Subbarao, have focused on better rate transmission so that all loan and deposit pricing becomes more transparent.
While Subbarao imposed the discount rate on lenders, the pricing of loans remained opaque, leading his successor Raghuram Rajan to introduce the concept of base rate, which required banks to report their lending rates on their websites and not to lend below the disclosed rate.
As this also did not lead to the desired results, his successor Urjit Patel imposed that lending rates be decided according to the cost of funds.
Still, former borrowers didn’t take much advantage, forcing the RBI under Das to apply referral-based external loan pricing.