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Borrowers will need to wait for three to six months before they see any meaningful rate cut from banks. After reducing the key policy rates on Tuesday by 25 basis points, the RBI Governor Urjit Patel said that he hopes the recent cuts in small savings rates will lead to lower deposit rates and ultimately will reduce borrowing rates.
Since January 2015, Reserve Bank of India (RBI) has reduced policy rates by 150 basis points. But banks have not revised interest rates downwards in the same proportion as the regulator.
But none of the banks have reduced interest rates on loans following RBI’s rate cut. B Sriram, managing director, State Bank of India, had said banks would need six more months to adjust to the MCLR system, which would complete one year in March 2017. After this there would be scope for more transmission. But he had also added that the reduction in the small savings deposit rates by 10 bps would give room to reduce deposit rates and cost of funds, and further the revision in lending rates would follow.
The RBI has introduced the new marginal cost of lending rate (MCLR) methodology for setting interest rates since April. This method takes into account cost of funds by banks both from deposits as well as market borrowings. The RBI governor said: “I agree that the transmission to bank borrowers has been less than what anyone of us would have liked it to be. And we are hoping that over the next quarter or two, also keeping in mind that the government has also reduced the small savings rate…the MCLR calculation itself will throw up more transmission,” Patel said.
