RBI further cuts rate by 40 bps. What about previous cuts?

In a widely expected move, RBI today slashed policy rates by 40 bps to ease Covid2019 impact. The repo rate now stands at 4% and reverse repo at 3.35%.

This is the second significant cut in the year. Previously, in March RBI had cut the repo rate by 75 bps.

“The MPC also decided to continue with the accommodative stance as long as it is necessary to revive growth and mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target,” RBI Governor Shaktikanta Das said in a video conference.

Further, the bank had announced several regulatory measures to reduce financial stress that included a further three-month moratorium on the term loan repayments.

Policymakers are of the view that the macroeconomic impact of the pandemic is turning out to be more severe than initially anticipated, and various sectors of the economy are experiencing acute stress, the RBI said.

My view on rate cut – its surely intended in the right direction. However, my experience with rate cuts so far (RBI has been consistently cutting rates with the hope that banks pass the rate cuts to the customers) –

  1. Banks quickly reduce their deposit rates – with the result that interest income to the retail consumer declines
  2. Most of the time rate cuts are only passed on to the highly rateed corporates because they are in a better bargaining position with the banks
  3. SMEs who really need the support, rarely get lower rates. This is both due to risk averseness of banks + SMEs own business dynamics
  4. Majority of retail customers get no rate advantage especially from the private sector banks. Their loans are linked with MCLR (repo linked being a new product), which banks don’t shift towards repo linked mechanism and to make it worse, MCLR linked rates keep on increasing due to the tight liquidity.

So, if RBI really wants to make transmission of lower rates to wider audience, it needs to make banks strictly accountable towards this. Banks on their own are not going to do it especially in the current highly uncertain environment.