Retail loans to be priced using external benchmarks
MUMBAI: The Reserve Bank of India (RBI) held its policy rates unchanged at its fifth monetary policy committee (MPC) meeting in the current financial year – the repo at 6.5 per cent and the reverse repo at 6.25 per cent, as widely expected by the market.
The MPC lowered the inflation projection to a much lower 2.7-3.2 per cent range for the second half of the current year compared with 3.9-4.5 per cent in the previous period. The committee also maintained the policy stance at ‘calibrated tightening’ as expected.
In an important move, the RBI has announced a strategic switch from the internal benchmarks to external benchmarks for pricing floating rate loans by banks, leaving behind the standards hitherto followed by the banks such as prime lending rate (PLR), benchmark prime lending rate (BPLR), base rate and the latest in the series, the marginal cost of fund based lending rates (MCLR).
In another move that may result in the release of funds estimated in the region of Rs1 lakh to 1.5 lakh crore into the system once fully implemented, the RBI has decided to reduce the minimum statutory liquidity ratio (SLR) to be maintained by the banks to 18 per cent from the current 19.5 per cent in phases starting from the quarter beginning January 1, 2018.
Each calendar year will witness a drop of 25 basis points in the SLR ratio until it reaches 18 per cent after the sixth quarter from now.
“Given the assessment that growth will remain healthy for the rest of the year, the MPC retained its stance at calibrated tightening so as to buy time to pause, reflect and undertake future policy action with more robust inflation signals. If upside risks do not materialize or are muted in their impact as reflected in incoming data, there is a possibility of space opening up for commensurate policy actions by the MPC,” RBI governor Urijit Patel said while addressing the press following the announcement of the MPC decisions.
Stating that cash reserve ratio (CRR) doesn’t fall within the remit of MPC, the RBI Governor said there was less chance for a cut in CRR to improve liquidity. “We have enough other instruments at our disposal to manage liquidity in the system,” he added.
The central bank which has been active in the market in the recent months through open market operations (OMO) to induce liquidity through purchase of bonds said it will continue to do so at least until March-end.
RBI has already pumped funds to the tune of Rs1.36 trillion through OMO during the year whereas another OMO for a value of Rs40,000 crore has already been announced.