RBI Monetary Policy Preview: Key Points

RBI Monetary Policy Preview: Key Points

Subject: Economy

Section: Monetary Policy

1. Repo Rate Expectations:
   • Likely to Remain Unchanged: RBI’s Monetary Policy Committee (MPC) expected to maintain the repo rate at 6.5% for the sixth consecutive time.
   • Steady Repo Rate: If maintained, it would mark a year of the repo rate remaining steady.
2. Monetary Policy Stance:
   • Expected as ‘Withdrawal of Accommodation’: The monetary policy stance likely to remain as a ‘withdrawal of accommodation.’
   • Consistent with Inflation Targets: Focus on maintaining CPI inflation at the 4% target.
3. Inflation Scenario:
   • December CPI Inflation: Increased to 5.69%, a four-month high, driven by higher food prices.
   • Government’s Band: Inflation within the 2-6% band but above the 4% target.
   • RBI’s Projection for FY24: CPI inflation at 5.4%, with Q3 at 5.6% and Q4 at 5.2%.
4. GDP Growth Forecast:
   • RBI’s FY24 Forecast: Real GDP growth at 7%.
   • Optimistic on Growth: RBI likely to sound optimistic on growth, recognizing fiscal consolidation.
5. Liquidity Measures:
   • Expectations: Some economists expect RBI to announce liquidity measures to address tight liquidity conditions.
   • Liquidity Gap: Gap between incremental credit and deposit in FYTD 2024 is Rs 3.6 lakh crore.
6. External Benchmark Lending Rates (EBLR):
   • Linked to Repo Rate: If repo rate remains unchanged, EBLRs linked to it will not rise.
   • Relief to Borrowers: Borrowers’ EMIs will not increase for loans linked to EBLRs.
7. MCLR-Linked Loans:
   • Possible Rate Hike: Lenders may raise interest rates on loans linked to MCLR.
   • Incomplete Transmission: Full transmission of the previous repo rate hikes not observed in MCLR-linked loans.
8. Future Rate Expectations:
   • Nomura’s View: Expects 100 bps of rate cuts, starting from August, with risks of earlier cuts.
   • Goldman Sachs’ View: Expects RBI to keep the policy repo rate unchanged until Q3 of CY24.
9. Monetary Policy Stance in April:
   • Expected Timing: A formal change to the monetary policy stance may be considered in April.
   • Current Liquidity Management: RBI likely to actively manage liquidity with the existing stance.
10. Overall Impact on Borrowers:
    • EBLR-Linked Loans: No immediate increase in EMIs.
    • MCLR-Linked Loans: Potential for interest rate hikes, impacting EMIs for these loans.

About Internal Benchmark Lending Rate (IBLR):

• Lenders establish an internal benchmark rate for determining interest rates on loans.
• Several benchmark rates were introduced over the years, including BPLR, Base Rate, and MCLR.
• These rates aimed to ensure transparent and efficient pricing in the lending market.

Issues with IBLR Regime:

• Banks often did not pass on the full benefits of RBI’s repo rate cuts to borrowers.
• Complex internal variables within the IBLR-linked loans hindered the seamless transmission of policy changes.

BPLR (Benchmark Prime Lending Rate):

• Used as a benchmark rate by banks for lending until June 2010.
• Loans were priced based on the actual cost of funds.
• The rate varied across banks and depended on the cost of funds, among other factors.

Base Rate:

1. Replaced BPLR and was used for loans taken between June 2010 and April 2016.
2. Considered the minimum interest rate at which commercial banks could lend to customers.
3. Calculated based on the cost of funds, unallocated cost of resources, and return on net worth.

MCLR (Marginal Cost of Funds based Lending Rate):

• Introduced in April 2016 as a benchmark lending rate for floating-rate loans.
• Considers the marginal cost of funds, negative carry on account of the cash reserve ratio, operating costs, and tenor premium.
• Linked to actual deposit rates, ensuring that when deposit rates rise, MCLR increases and lending rates go up accordingly.

External Benchmark Lending Rate (EBLR):

• RBI mandated the adoption of a uniform external benchmark by banks from October 1, 2019, it was intended to plug the deficiencies in MCLR.
• Four external benchmarking mechanisms were introduced, RBI repo rate, 91-day T-bill yield, 182-day T-bill yield, any other benchmark market interest rate as developed by the Financial Benchmarks India Pvt. Ltd.
• Banks have the flexibility to set the spread over the external benchmark, with interest rate resets required at least once every three months.

Significance of EBLR:

• Aims to facilitate faster and effective transmission of monetary policy changes.
• Enhances transparency in interest rate setting and standardizes the process of fixing interest rates for different loan categories.
• Introduces a more dynamic and responsive lending environment in line with the objectives of the RBI’s monetary policy framework.