RBI Monetary Policy Preview: Key Points
- February 6, 2024
- Posted by: OptimizeIAS Team
- Category: DPN Topics
No Comments
RBI Monetary Policy Preview: Key Points
Subject: Economy
Section: Monetary Policy
- 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.
- 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.
- 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%.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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:
- Replaced BPLR and was used for loans taken between June 2010 and April 2016.
- Considered the minimum interest rate at which commercial banks could lend to customers.
- 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.