RBI's repo rate transmission on bank lending rates and deposits - A bittersweet symphony

Overall, RBI has brought down repo rate by 200 bps in 14 months (April 2019 - May 2020).

Jul 10, 2020 04:07 IST India Infoline News Service

The Reserve Bank of India (RBI) has trimmed down the policy repo rate to 4%, on which CARE Ratings believes the transmission of the rate has been effective to different degrees. In its research note, CARE points that on the lending side the transmission has been even swifter especially on fresh loans, while deposits have also seen some quantum of the downward trend.

CARE's data showed that RBI's repo rate from April 2019 till March 2020 saw a total of 85 basis points rate cut. However, during the lockdown period announcement on March 27, the RBI  lowered the repo rate by 75 bps bringing the total reduction in FY20 to 160 bps with the year ending with a repo rate of 4.4%.

Though RBI further trimmed down the repo rate by 40 basis points in May policy, however, the last cut impact would be seen in  FY21 rather than FY20. Overall, RBI has brought down repo rate by 200 bps in 14 months (April 2019 - May 2020).

According to the research note, the monthly weighted average lending rate (WALR) on fresh loans, between April 2019 - March 2020 (before 75 bps cut), declined by 94 basis points (bps) which are higher from the 85-bps drop in repo rate. It was observed across all bank categories with private and foreign banks having over 120% and while PSBs responding by around 85%.

Compared to 160 bps cut in repo rate for FY20, the WALR came down by 122 bps which is quite significant with the response of WALR
on fresh loans being above 75%.

Another way of understanding the transmission of repo rate would also be bank response in their MCLR on which data is available till June.

In CARE's note, the response of the median MCLR was less significant with the 85-bps cut being associated with just 54 bps which is less than 65%. However, the median of 8.20% in March was associated with a minimum of 5.44 % and a maximum of 10.55%. This response was even smaller post-March as 115 bps cut in repo led to just 50 bps in median MCLR till June with the response rate being a little over 40%.

For the entire period, the MCLR for one year was down by 104 points which were lower to the 200-bps cut in repo rate.

CARE said, "On the lending side banks have responded with a good deal of alacrity as seen in the decline in the WALR on fresh loans.  Deposit rates too have moved down though not to the same extent."

In regards to deposits, reduction in repo rate by 75 bps led to a decline of 26 bps for the system in May (response rate of around 35%) bringing a total of 77 bps decline in deposit rates against 160 bps cut in repo rate during this 14-month period. There has hence been a transmission rate of just about 50% in average deposit rates.
Post-May 22, the average deposit rate on 1-year deposits of the banking system based on five large banks came down from a mid-value of 5.7% to 5.375%, a reduction of 32.5 bps. With the repo rate being lowered by 40 bps the response was close to 80% reduction in the 1-year deposit rate, added CARE's data.

CARE added, "Monetary policy action hence can be said to have been quite effective in terms of transmission and depending on the evolving situation can be expected to play an important part in guiding the direction of interest rate movements. 

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