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Last updated: 23 Jun, 2020  

RBI.Thmb.jpg Rate cut transmission

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Bikky Khosla | 23 Jun, 2020

Amid the ongoing COVID-19 crisis, the Reserve Bank of India (RBI), in an out-of-turn Monetary Policy Committee (MPC) meeting last month, reduced the key interest rate or the repo rate by 40 bps. In another relief to commercial borrowers, the central bank extended the loan repayment moratorium for another three months till August 31. While these measures are welcome, the lingering issue of poor transmission of RBI rate cuts by the banks to the borrowers is still a concern.

Recently, the Finance Minister raised this issue during a video conference with an industry body. When the RBI cuts the repo rate – the rate at which it lends money to banks -- banks get money at a cheaper rate, but time and again poor transmission of these rate cuts has led to little change in the credit scenario at the ground level. But this time, the minister added, the Centre is closely monitoring the situation in consultation with banks to ensure reduced interest rates for end-consumers.

Also, though banks have started disbursing funds to MSMEs under the Emergency Credit Line Guarantee Scheme, credit is still a huge challenge for many. The scheme excludes first-time borrowers and those firms accounts of which have turned bad, and as a result, many MSMEs are facing severe lack of finance, along with slump in demand during these days. The Centre, therefore, should urgently consider to operationalize the recently announced scheme for stressed MSMEs.

The RBI, according to the MPC minutes of the last meet, said that it may continue with its accommodative stance as the economy is expected to take more time to recover. Also, a recent report views that the Repo rate can be reduced by another 100 basis points to limit the cost of government borrowings. In addition, India's wholesale prices posted 3.2% fall in May – the sharpest in more than four years – raising expectation of another rate cut whenever the MPC chooses to meet next.

I invite your opinions.

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