Commercial banks on Wednesday lauded the Reserve Bank of Indias decision to cut key interest rates by 25 basis points as a move that would boost investor sentiments.
Given the urgent need to reinvigorate investment in India, the falling trajectory of core inflation over the last quarter opened up room for the 25 basis points cut in the central bank's key interest rate, RBI Governor Urjit Patel said on Wednesday.
The Reserve Bank of India on Wednesday cut its repo, or short-term lending rate for commercial banks, to 6 per cent from 6.25 per cent, reverse repo rate to 5.75 per cent from from 6 per cent.
"The RBI decision to cut repo rate was a welcome move and will perk up market sentiments. The policy commentary was nuanced and balanced, indicating upside risks to inflation have waned, whereas growth impulses in industry and services are weakening. We are hopeful that this measure should enable a gradual recovery in credit cycle with a revival of demand," said Arundhati Bhattacharya, Chairman of the State Bank of India.
"The prudent approach of the central bank in reacting to incoming data in a calibrated manner will reinforce the confidence amongst global investors. A number of regulatory and developmental measures like tri-party repo for corporate bonds and enhanced limits for foreign investors using the futures market have also been announced," said Chanda Kochhar, MD and CEO, ICICI Bank.
Meanwhile, the RBI has constituted an internal group to study the marginal cost of lending rate (MCLR) system for commercial banks designed to improve monetary policy transmission, RBI Deputy Governor Viral Acharya said on Wednesday.
"The experience with the MCLR system introduced in April 2016 has not been entirely satisfactory," Acharya told reporters here following announcement of the RBI's third bi-monthly monetary review of the current fiscal.
"The RBI will constitute an internal study group to study various aspects of the MCLR system. This group will submit its report by September 2017," he added.
Introduced from April 2016 as an advance over the base rate system, MCLR is a new methodology for setting the lending rate by commercial banks to facilitate transmission to customers the benefits of rate cuts by the RBI. It is mandatory for banks to consider the repo rate while calculating their MCLR.
After the 25 basis points cut in the repo rate by the RBI on Wednesday, the cost of funds for the banking system is expected to come down further. Home loan borrowers are expected to benefit from lower EMI's as a bank's cost of funds, as reflected by its MCLR, is also expected to come down.
A recent survey by industry body CII showed that MCLR rates have seen minimal reduction across banks even though there is surplus liquidity in the market and rate cuts on deposits.
State Bank of India Managing Director Rajnish Kumar had said earlier this year that further reduction in MCLR is not possible if the banks are unable to cut down their deposit rates.