Retail, MSME loans to get cheaper as RBI cuts repo rate in surprise action

With the 40-basis point cut in the repo rate, retail and MSME (micro, small and medium enterprise) loans linked to the external benchmarks are set to become cheaper. The deposits rates are also likely to be slashed, as lenders are focussing on protecting margins, according to

The rate transmission in the case of loans linked to an external benchmark such as the policy repo rate will be automatic, they said.

Banks will soon hold a meeting of their Asset-Liability Committee (ALCO) to decide on loans linked to the marginal cost of funds-based lending rate (MCLR). ALCOs will also review the deposit rates, keeping in view the huge liquidity in the system.

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Rajnish Kumar, chairman of State Bank of India (SBI), said, “Interest rates are likely to go down for borrowers as well as depositors. We will convene an ALCO meeting and decide on rates.”

The country’s largest private sector lender, HDFC Bank, on Friday cut its base rate by 55 basis points (bps) to 8.10 per cent, effective May 22, following the Reserve Bank of India’s (RBI’s) rate cut move.

The RBI said in its policy statement that monetary policy transmission to banks’ lending rates had continued to improve. The one-year median MCLR declined by 90 bps (February 2019-May 2020).

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The weighted average lending rate (WALR) on fresh rupee loans has cumulatively declined by 114 bps since February 2019, of which 43 bps decline occurred in March 2020 alone. The WALR on outstanding rupee loans declined by 29 bps during October 2019-March 2020.

Domestic financial conditions have also eased as reflected in the narrowing of liquidity premia in various market segments. The rates on market traded financial instruments have also eased since the middle of last month. After April 17, interest rates on the three-month commercial paper have softened by 220 bps. The yields on AAA-rated five-year corporate bonds have come down by 48 bps; and on the 10-year government papers, yields have declined by 66 bps by May 15, the RBI said.

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