RBI's Monetary Policy: Beyond 'rates'
December 5, 2018
This refers to your editorial “Beyond a rate cut” (Business Standard, December 4). Today, after the usual three-days deliberations RBI’s Monetary Policy Committee, has opted for retaining the base rates unchanged. For some time now, the central bank’s bank rate has not been having much influence on interest rates in the financial market. Media and the analysts have been camouflaging this trend by phrases like ‘market had already factored in the change’ or ‘it takes some time to percolate the impact to ground level’. In reality, this tool has lost the influence it had on the rate of ‘rent’ on resources till the beginning of this decade. This is not to underplay the significance of MPC’s professional assessment of the influence of developments in the economy on inflation-related issues. Definitely, the periodic assessments should serve as accelerator and brakes in policy formulation.
Equally important is the statement setting out various developmental and regulatory policy measures for strengthening regulation and supervision; broadening and deepening of the financial markets; and enhancing customer education, protection and financial inclusion, issued today by RBI simultaneously with the Monetary Policy Statement.
The decision that all new floating rate personal or retail loans (housing, auto, etc.) and floating rate loans to Micro and Small Enterprises extended by banks from April 1, 2019, shall be benchmarked to (a) Reserve Bank of India policy repo rate, or (b) Government of India 91 days Treasury Bill yield produced by the Financial Benchmarks India Private Ltd (FBIL), or (c) Government of India 182 days Treasury Bill yield produced by the FBIL, or (d) Any other benchmark market interest rate produced by the FBIL, will bring some transparency and uniformity in approach in charging of interest rates.
There is another welcome condition that the spread over the benchmark rate, though to be decided wholly at banks’ discretion at the inception of the loan, should remain unchanged through the life of the loan unless the borrower’s credit assessment undergoes a substantial change and as agreed upon in the loan contract.
M G Warrier, Thiruvananthapuram