Rates cut 1.5%, banks passed on only 1/3rd to home loans
NEW DELHI: The Reserve Bank of India has cut key policy rates by 1.5 percentage points since January 2015 to signal lower interest rates in the economy, but home loan borrowers have got only around one-third of the benefit.
This may force RBI governor Raghuram Rajan to hold off on a fresh cut next month, especially with inflation and global petroleum prices edging up.
The reluctance of banks to pass on the benefit of the lower rate regime has prompted the RBI to repeatedly prod lenders to share the gain, including through a shift to a marginal cost of funds-based lending rate.
Unlike UPA, the Modi government has refrained from “advising banks” on interest rates.
RBI may not cut rates due to rising inflation
Perhaps more important at this juncture is to ensure that current and past policy rate cuts transmit to lending rates, RBI governor Raghuram Rajan had said last month. The government and RBI were hoping that banks would be more aggressive with rate cuts from April after the finance ministry opted for sharp reduction in rates on small savings schemes such as PPF and post office deposits.
In fact, the 60 basis points fall in the base or the benchmark rate of top 10 banks is in many cases more than the benefit that has accrued to home loan borrowers. Bank customers have always complained of being short-changed, especially when the reduction in deposit rates has been much steeper at around 120 basis points (100 basis points equal one percentage point) and impacts senior citizens the most.
The tardy transmission of interest rate cuts by the central bank into the banking system may also force the RBI to adopt a wait and watch posture for now, said a source. “Inflationary pressures are there and the transmission of policy rates cuts have been slow. Therefore, the RBI may prefer to wait and watch before cutting rates further,” said a senior government official.
Data in recent months has complicated the policy choice. Both retail and wholesale price inflation data have pointed to rising pressure led by some food prices. Global crude oil prices have also rallied and edged close to $50 a barrel. While there is no immediate threat to the overall economy, the central bank may prefer to remain cautious, say officials. Industrial output data has remained volatile but still shows the sector remains sluggish.
While RBI expects retail inflation to remain around 5% in the current fiscal year it has called for a strict watch on the prices front and hopes the supply side management by the government would help moderate prices.
“The persistence of inflation in certain services warrants watching, while the implementation of the 7th Central Pay Commission awards will impart an upside to the baseline through direct and indirect effects,” Rajan had said in the April review.