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RBI’s rate cut: How much benefit can borrowers expect?

The Reserve Bank of India (RBI) slashed interest rates (repo) by 25 basis points (bps) last week and changed its outlook from ‘neutral’ to ‘accommodative.’ The repo rate now stands at 5.75 per cent, after three consecutive rate cuts from its recent peak of 6.5 per cent.

But the hope that borrowers across the board have is of the rate cuts resulting in a significant reduction in their EMIs. However, even after a 50 basis points cut(25 bps each in February and April 2019), there has been a transmission of just 21 bps, as indicated by the weighted average lending rate (WALR) on fresh rupee loans, a Kotak Institutional Equities report stated. The weighted average lending rate is the aggregate rate of interest paid on all debt.

Banks have been slow to pass on the benefits of repo rate cuts to borrowers. Moneycontrol reached out to industry experts to get their take on the likely extent and timelines of rate cut benefits reaching consumers. Industry experts shared their take on the total cut of 75 basis points this year and the challenges banks face, as a result of which they are forced to hold back on the transmission of these rates.

Cost of capital, the key for lower rates

Monish Shah, Partner, Deloitte India

As the structural issues in terms of asset quality, liquidity as well as slowdown in both consumption and investment cycles get addressed, banks will be better-placed to transmit rate cuts to borrowers. There is a mismatch between deposits and credit growth for the banks. Banks continue to face a relatively higher cost of capital, limiting their ability to transmit the benefits of the monetary policy easing. As a result, banks are still holding to higher interest rates or have lowered the rates by minimal levels.

With liquidity coming in and the possibility of further rate cuts in the next few months, banks will be better-placed to pass on the benefits to end customers.

High deposit rates holding back banks

 Rahul Prithiani – Director, CRISIL Research

Expectations for healthy deposit growth and repo rate cuts worth 75 bps over the past five months are likely to result in the transmission of interest-rate benefit from banks to customers. However, in the near term the rate of transmission is likely to be relatively lower at 10-20 bps (approx.), as deposit rates will stay relatively firm and credit costs remain high.

Benefits come with a lag

Ranen Banerjee, Partner & Leader – Public Finance and Economics, PwCIndia

Generally, the transmission of repo rate cut takes time. There would be some passing on of the residual part that had not been passed on from the past two repo rate cuts but the pass on would not be full. The banks are also facing challenges in deposit mobilisation as well as the higher non-performing assets (NPAs) making a dent on their profits. There is a liquidity challenge also, but the additional measures on giving them some leeway on the provisioning of defaulting loans as per latest circular could give some headroom to the banks.

Anaemic reduction in the near term

Dr Rucha Ranadive, Economist, CARE Ratings

Past instances reveal that any change in the policy rate is immediately transmitted onto the weighted average lending rate (WALR) on fresh rupee loans. However, the marginal cost-of-fund-based lending rate (MCLR) appears to be relatively sticky when it comes to transmission.

After the February 2019 rate cut, the WALR on fresh rupee loans declined within two months by the same magnitude (25 bps), whereas MCLR fell by only 8 bps till May 2019. On the other hand, the WALR on outstanding rupee loans has rather increased by 4 bps as past loans continue to be priced at high rates.

Thus, we are expecting that the WALR on fresh rupee loans would see full transmission of rate cuts within the next 3-4 months, while the MCLR will see a moderate decline by 8-10 bps in the next 3-6 months in the absence of any concrete measure by the RBI for the transmission mechanism.