Govt To Monitor Banks; Aims to Maximise Benefits of RBI’s Repo Rate Cut

Following RBI’s decision to cut repo rate by 25 basis points to 6.25%, government officials are keeping a close watch on banks and lenders to pass on the necessary benefits of rate reduction in a proper manner to the customers. A government official noted that RBI will intervene, if adequate benefits are not passed in the coming weeks.

He told ET, “There is no stipulated timeline. Each bank's asset-liability committee will take a call, but it should not be the case that there is no, or very marginal, benefit passed on.”

Notably, RBI announced a rate cut of 25 bps, potentially leading to lower interest rates spanning across housing loans and other credit facilities.

In 2019, most banks passed benefits only up to 5 bps despite RBI’s rate cutting measure of 25 bps, calling out a need for a high-priority meeting between RBI and banking institutions.

Previously, RBI governor Shaktikanta Das highlighted the need of rate transmission post rate cuts, while outlining the plans to discuss necessary measures with banks.

The central bank had earlier raised the issue of inadequate monetary transmission, while highlighting its impact on limiting the effectiveness of policy with regards to economic activity and inflation.

An analysis by Emkay Global Financial Services highlights that while the system liquidity touched ₹70,000 crore, it "will turn ugly" reaching beyond ₹2.5 lakh crore by March-end without additional measures.

“This implies that more measures are on the anvil if the RBI finds this level of deficit uncomfortable for policy transmission, especially as the depth of the cut cycle is still arguable,” it noted. Notably, repo rate reduction will affect margins of banks (5-12 bps), especially those with higher floating or repo-linked loan portfolios.