25% reduction in the key rate on cards

The Reserve Bank of India (RBI), concerned about the drop in the transmission of repo rate cuts over the last six months, is expected to begin Monday its bi-monthly meeting of the Monetary Policy Committee (MPC), in the Waiting for an additional 25 basis points cut rate.

There has been a growing debate between banks and the RBI on liquidity – the availability of funds in the system. The central bank, for its part, estimates that the system has a liquidity surplus of 1,000 krona of lakh – which is sufficient to pbad on the benefits of rate reductions to end-users. In fact, Governor Shaktikanta Das, of the Reserve Bank of India, has repeatedly expressed dissatisfaction with bank officials because of the almost negligible transmission of reported benefits.

On the other hand, banks believe that it lacks liquidity in the country to be able to reduce lending rates.

According to the data available with the RBI, the MCLR would be in a range of 8% to 8.40% during the month of July 2019, ie 10 to 25 basis points (bp) higher than the interest rates of the RBI. 7.9% to 8.05% prevailing a year ago.

Of the 36 banks in the public and private sectors, only six banks – Bank of Maharashtra, Punjab National Bank, Syndicate Bank, United Bank, Bandhan Bank and Kotak Mahindra Bank – had their respective MCLRs below the July 2018 level. Average interest rates for the 36 banks of the previous month were 9.01%, 14 basis points lower than 8.87% a year ago.

What do pension transactions say?

Repo transactions by the central bank revealed that the overall liquidity of the banking system was still in surplus during the past week at 1 crore lakh. This is the eighth consecutive week in which the banking system has experienced excess liquidity. Banks and markets, on the other hand, are fighting for the reduction of the ratio of cash reserves (CRR). Estimates suggest that a 1% rate reduction in the CRR, compared to the current rate of 4%, will inject cash into the system worth 1.28 million crore rupees.

Many members of the central bank believe that current market conditions prevent transmission. "According to a school of thought, banks are not willing to lend, given the market situation. So they keep the rates high, "said an official of the RBI.

However, according to economists, it is because of the slowdown in relative deposit growth that banks are unwilling to pbad lending rates. Deposits over the last year increased by 10.6%, while advances increased by 12.2%.

In addition to key rates, the central bank's comments on growth and inflation would be closely monitored.