- At the next monetary policy meeting, raising interest rates will increase the burden on consumers
The downward spiral that began in February 2019 is now coming to an end. The Reserve Bank of India is reported to be raising policy rates soon. However, an important finding in the analysis of the data is that in the last two and a half years, the borrowers have not really got the full benefit of the reduction in interest rates. . The repo rate has been reduced by 250 basis points since February 2019. As of August 2021, the weighted average lending rate (WALR) of all banks’ outstanding loans has been reduced by only 118 basis points. The reduction in interest rates in large industries, infrastructure, trade and business services was transmitted rapidly. During March 2019 and August 2021, it decreased from 181 to 226 points. On the other hand, the WALR of retail loans such as housing, auto and education loans has declined by only 98 to 185 basis points. MSME’s outstanding loan WALR has also declined by only 182 basis points. The RBI cut interest rates at a monetary policy meeting to keep inflation in check due to the Kovid epidemic that began in March 2020. However, after the second wave of Covid, pre-Covid levels have seen recovery in most sectors. Food inflation is expected to be under control, with optimism that the products will remain good with normal rainfall. Considering all the factors, the RBI may raise interest rates in the near future.
The reduction in the policy rate has no immediate effect on loan rates
The bulk of loans disbursed by banks come from depositors. These include current accounts and savings accounts (CASAs). On the other hand, banks’ reliance on RBI repo operations is only 10%. MCLR-based loans account for 60% of the total floating rate loans of banks. All of these factors have made it difficult for banks to pass on the benefits of lower repo rates to borrowers.