The RBI on Wednesday announced that it will link the base rate with the Marginal Cost of Funds based lending rates (MCLR) from April 1 this year to ensure that banks pass on the benefit of reduced policy rates to borrowers. Former RBI governor Raghuram Rajan introduced the MCLR in 2016 to calculate the benchmark lending rate in another attempt to make banks pass on policy rate cut benefits to borrowers quickly and in a more transparent manner.
"It is observed, however, that a large proportion of bank loans continue to be linked to the Base Rate despite the Reserve Bank of India highlighting this concern in earlier monetary policy statements. Since MCLR is more sensitive to policy rate signals, it has been decided to harmonise the methodology of determining benchmark rates by linking the Base Rate to the MCLR with effect from April 1, 2018, it said.
Under the base rate were following individual methodologies for computing the minimum rate at which they could lend. Under the MCLR, RBI asked all banks to follow the marginal cost of funds method to arrive at their benchmark lending rate.
RBI sticks to status quo on key rates
The Reserve Bank of India (RBI) on Wednesday left its key repo rate untouched at 6.00 per cent for the third bi-monthly policy review in a row as it refrained from going in for a hawkish policy to control inflation at the cost of growth. The repo rate is the interest the RBI charges banks for short-term loans. The Monetary Policy Committee feels the "nascent recovery needs to be carefully nurtured and growth put on a sustainably higher path through conducive and stable macrofinancial management," the central bank said.
RBI Governor Urjit Patel told reporters it was prudent to stay the course."We felt that at this stage, without more data coming in, it was not necessary to change repo rate or the neutral stance," he explained. Surging oil and food prices pushed India's annual consumer inflation to a 17-month high of 5.21 per cent in December, well above the RBI's 4 per cent target. The RBI appears to be in tune with the views of government officials and India Inc. that a premature tight money policy with higher interest rates could choke growth at a time when green shoots of recovery are surfacing in the economy.
Bonds surged, sending the benchmark 10-year yield down as much as 11 basis points from levels before the decision, amid relief the RBI statement wasn't as hawkish as some feared. The rupee and the broader NSE share index weakened slightly. Nonetheless, analysts warned that rate hikes were still possible after the central bank projected higher inflation in months ahead.
"The guidance is likely to remain data-dependent, with a shift to tighten rates requiring further evidence in a build-up in inflationary pressures," said Radhika Rao, group economist for DBS in Singapore. The RBI has kept the repo rate unchanged since a 0.25 per cent cut in August, having taken advantage of a period of extraordinary low inflation to cut rates by 2 per cent since early 2015. But inflation is seen accelerating, especially after the union budget last week widened the fiscal deficit target to finance a sharp increase in spending on rural areas and health-care.
The RBI said it expected inflation to accelerate to 5.1 to 5.6 percent in April-September, from 5.1 percent in the first three months of this year. The central bank had expected inflation to ease to 4.5-4.6 percent in October-March, due to softening food prices and a favourable base effect, but it called risks "tilted to the upside". There is "need for vigilance around the evolving inflation scenario in the coming months," the RBI said.
Bond investors have already priced in rate hikes, with 10-year yields rising more than 100 basis points since July, the biggest move since a crisis in 2013 with the rupee. But any decision to move to raise rates, including by potentially shifting the RBI's stance to "tightening" from "neutral" won't be easy.
The RBI slightly lowered its gross value added forecast - a measure of economic growth it prefers - for the year ending in March to 6.6 percent from 6.7 per cent. India's economy is expected to grow 7.0-7.5 percent in the 2018-19 fiscal year, below the 8 percent pace economist say is needed to create enough jobs for its youth.