The Reserve Bank of India (RBI) Governor will soon meet chief executives of public sector banks to discuss, among other things, the issue of monetary policy transmission. This follows the central bank lowering the interest rates for the first time in one-and-a-half years.
Banks have always been reluctant to reduce interest rates whenever there is a rate cut by the RBI.
“Whenever there is policy rate reduction, it would be RBI’s expectation that monetary transmission does takes place,” RBI Governor Shaktikanta Das said during the post monetary policy media interaction.
Banks’ role
“But we have to keep in mind that fixing the rate of the interest is a function of the bank. We will be having an interaction in the next fortnight or so with the CEO and MDs of all banks where we will discuss these issues,” he added.
Banks have been increasing lending rates since March 2018. While the RBI has proposed that banks should move to an external benchmark for loan pricing from April 1, lenders have been opposing the move saying their funding costs were not linked to the external benchmarks proposed by the regulator.
“We hope that the rate cut will be transmitted by the financial sector to the real economy, so that economic activity could [take advantage of] the benefits and private consumption/investments may also grow faster,” said Motilal Oswal, chairman & MD, MOFSL. Non-banking finance companies, which are predominantly dependent on bank funding and have seen their borrowing costs climb ever since the IL&FS crisis broke out in August, also expect the cost of funds to come down.
“RBI’s decision to reduce the repo rate and changing its stance to neutral are highly positive changes to boost the sentiment of consumers and home loans. The recent steep rise in the cost of borrowing of NBFCs and HFCs is likely to moderate. EMIs are expected to come down slightly,” said Deo Shankar Tripathi, MD & CEO of Aadhar Housing Finance.