Banks taking a reverse in reducing lending rates

By Accommodation Times News Bureau

It seems that banks are not passing the rate cut benefits even after RBI slashed its rates

The Reserve Bank of India (RBI) so far slashed the policy rate by 75 basis points to spur growth in 2013. However banks have not yet started reducing their lending rates citing liquidity tightness. In the absence of prompt transmission, a shift of the policy rate from repo to reverse repo is seen as a key lubricant to ensure softening interest rates.

A repo rate is the rate at which banks borrow money from RBI. Reserve repo is the rate at which banks park their excess funds with the central bank. RBI assigns repo as the key policy rate and maintains a spread of 100 bps between repo and reserve repo. The lending rates will drop once operating policy rate shifts from repo rate to reserve repo rate. This means that the system liquidity should shift from deficit to surplus. When banks get the fear of lending their surplus funds to RBI at reserve repo rate, lending rate will drop and will also lead to pick up in investments, hence the demand for CRR cuts for infusion of liquidity into the system

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