RBI acknowledges transmission of repo rate cuts in money, bond markets

New Delhi: The Reserve Bank of India on Thursday noted that in the credit market, the 1-year median marginal cost of funds-based lending rate (MCLR) has declined by 49 basis points and the weighted average lending rate (WALR) on fresh rupee loans sanctioned by banks declined by 44 basis points as against the cumulative reduction in the policy repo rate by 135 bps during February-October 2019.

Credit market refers to the market through which companies and governments issue debt to investors, such as investment-grade bonds, junk bonds, and short-term commercial paper.

The credit market in India plays an important role in meeting the financing needs of various segments of the economy. This market is regulated by the RBI, SEBI, The Securities Contracts Regulation Act (SCRA) and Ministry of company affairs (MCA).

The central bank did acknowledge that transmission of its rate cut to the borrowers has been happening. The RBI said most banks had linked their lending rates to the policy repo rate of the Reserve Bank.

"The median term deposit rate has declined by 47 bps during February-November 2019. The weighted average term deposit rate declined by 9 bps in October as against a decline of just 7 bps in eight months during February-September. This augurs well for transmission to lending rates, going forward," it added.

Monetary transmission has been full and reasonably swift across various money market segments and the private corporate bond market. As against the cumulative reduction in the policy repo rate by 135 bps during February-October 2019, transmission to various money market and corporate debt market segments ranged from 137 bps (overnight call money market) to 218 bps (3-month CPs of non-banking finance companies).

Transmission to the government securities market has been 113 bps for yields on 5-year government securities and 89 bps for yields on 10-year government securities.

In the credit market, the 1-year median marginal cost of funds-based lending rate (MCLR) has declined by 49 basis points. The weighted average lending rate (WALR) on fresh rupee loans sanctioned by banks declined by 44 basis points.

Going forward, transmission is expected to improve with the introduction of the external benchmark system, as most banks have linked their lending rates to the policy repo rate of the Reserve Bank. Already, the weighted average term deposit rate has fallen by 16 bps.

Overall liquidity in the system remains in sizable surplus. This augurs well for transmission to lending rates, going forward, RBI Governor Shaktikanta Das said on Thursday during Monetary Policy announcements.

All leading banks including market leader SBI have followed repo rate as external benchmark rates.