Repo rate cut transmission on deposits will be slower
The Reserve Bank of India (RBI) recently announced a repo rate cut of 25 basis points, bringing it down to 6%. This move was welcomed by many as it is expected to boost economic growth and provide relief to borrowers. However, there is one aspect of this rate cut that may not have a direct impact on the common man – the transmission of this rate cut on deposits.
Repo rate is the rate at which the RBI lends money to commercial banks. When the repo rate is reduced, banks can borrow money at a lower cost and in turn, reduce the interest rates on loans. This is expected to encourage borrowing and stimulate economic growth. However, the transmission of this rate cut on deposits is a different story altogether.
Deposits are a major source of funds for banks and they play a crucial role in determining the interest rates on loans. When the repo rate is cut, banks may not necessarily reduce the interest rates on deposits at the same pace. This is because banks have to balance their cost of funds and profitability. If they reduce the interest rates on deposits too quickly, it may affect their profitability and ability to lend.
Moreover, banks also have to consider the competition in the market. If one bank reduces the interest rates on deposits, others may have to follow suit in order to remain competitive. This can lead to a slower transmission of the repo rate cut on deposits as banks may wait for their competitors to make a move before taking any action.
Another factor that affects the transmission of repo rate cut on deposits is the liquidity in the market. When there is excess liquidity, banks may not feel the need to attract more deposits by offering higher interest rates. This can also lead to a slower transmission of the rate cut on deposits.
Furthermore, the RBI has also introduced a new liquidity management tool called the ‘Marginal Cost of Funds based Lending Rate’ (MCLR). This means that banks have to consider their marginal cost of funds while determining the interest rates on loans. This has made the transmission of repo rate cuts on deposits even more complex as banks have to consider multiple factors while setting interest rates.
So, what does this mean for depositors? It is important to understand that a slower transmission of the repo rate cut on deposits does not necessarily mean that depositors will not benefit at all. Banks may still reduce the interest rates on deposits, but it may not be at the same pace as the repo rate cut. This may also vary from bank to bank.
Moreover, depositors should also keep in mind that a lower interest rate on deposits does not necessarily mean a lower return on their investment. In fact, a lower interest rate on deposits can also lead to a lower inflation rate, which means that the purchasing power of their money remains intact.
In addition, the RBI has also taken measures to ensure that banks pass on the benefits of the repo rate cut to borrowers. The central bank has mandated banks to link their lending rates to an external benchmark, which will make the transmission of rate cuts more effective. This will also bring more transparency in the interest rate setting process.
In conclusion, while the transmission of repo rate cut on deposits may be slower, it is important to understand that this is a necessary step for banks to maintain their profitability and liquidity. The RBI has also taken measures to ensure that the benefits of the rate cut are passed on to borrowers. As depositors, we should not be discouraged by the slower transmission and instead, focus on the overall positive impact of the rate cut on the economy.
