uploads///Base Rate of Some Indian Banks

How India’s April Repo Rate Cut Will Affect Borrowers

David Ashworth - Author

Aug. 18 2020, Updated 6:25 a.m. ET

Pass-through is important

In the previous article of this series, we mentioned that the policy transmission will become smoother because of various policy moves from the RBI (Reserve Bank of India) on April 5. In addition to cutting the repo rate, the central bank eased statutory requirements and narrowed the policy corridor.

But rate reductions by a central bank don’t guarantee pass-through to the general public. This can happen only when banks and other lenders reduce their own lending rates. Even before the repo rate cut on April 5, the RBI reduced its key rate by 125 basis points since January 2015. However, less than half of that amount was passed on to consumers.

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The repo rate reduction in April, along with other actions, should give banks enough reason to reduce their respective base rates. The base rate includes all common lending rates. It is the rate below which a bank cannot lend. This system has been in place since July 1, 2010. In the graph above, the first three banks are public-sector banks while the remaining three are private-sector banks.

As can be seen from the graph above, rates have hardly come down from January 2015 in light of the fact that the repo rate has now been reduced by 150 basis points. In the same period, deposit rates have fallen by over 100 basis points. It is important to note that loans sanctioned from April 1, 2016, will be in reference to MCLR (marginal cost of funds-based lending rate) instead of the base rate.

Impact on borrowers

A reduction in the base rate and the newly introduced MCLR will make loans cheaper for consumers. With less incentive to save due to the sharp fall in deposit rates and more reasons to spend, consumer spending is expected to grow. This, in turn, should help the economic output of the country.

Apart from pushing consumer spending, banks like ICICI Bank (IBN) and HDFC Bank (HDB) are expected to benefit due to a higher loan offtake. The rate cut will also have an impact on revenues of companies like Infosys (INFY) and Wipro (WIT), which do outsourcing work and bill their clients in US dollars. Policy level changes could also impact mutual funds like the Wasatch Emerging India Fund (WAINX) and the Franklin India Growth Fund – Class A (FINGX).

In the next article, let’s see how the different sectors of the Indian economy are placed according to the RBI.


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