India’s Supreme Court wants to know if consumers actually benefit when the RBI cuts interest rates
Dilsher DhillonOct 9, 2018, 01.52 PM
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Supreme Courthas asked the RBI to assess whether repo ratecuts translated into lower retail loan rates for Indian people.
- The order from the Supreme Court follows a public interest litigation filed by Moneylife Foundation, which complained that Indian banks were overcharging retail borrowers.
- Despite the recent rate hikes, the RBI embarked on an easing cycle from early 2015 to August 2017, lowering the repo rate rom 8% to 6%.
However, while rate cuts lead to increased consumer confidence and investor sentiment, it remains to be seen the extent that commercial banks pass them on to customers.
Seeking a definitive answer on the issue, on 8 October India’s Supreme Court asked the RBI to assess whether repo rate cuts translated into lower rates for Indian people for loans on housing, education, cars and consumer goods.The central bank, which has been given six weeks to present its findings, explained that it was ready to make it binding for domestic banks to cut
The order from the Supreme Court follows a public interest litigation filed by Moneylife Foundation, an NGO focusing on personal finance issues. In response to a RBI report alluding to the same, the foundation wanted to know the extent to which banks and non-banking lenders were overcharging retail borrowers by extending credit at higher rates than the repo rate. The petition also calls for banks to publish the methodology they use to settle on specific lending rates.
The issue has been a thorn in the RBI’s side for a while. In response to what it perceived as a slowness of banks to implement repo rate changes, it announced the introduction of its Marginal Cost of Funds based Lending Rate (MCLR) regime in April 2016. The system compels commercial banks to consider the repo rate when pricing loans as they have to readjust rates on a monthly basis. The MLCR takes into account the incremental changes in cost of funds for banks as opposed to the base rate system, which takes into account the average cost of funds.
A change of pace this year
The repo rate has been going up since April 2018 as the RBI has sought to keep inflation in check and prevent the return of foreign funds to safe havens like the US, which has embarked on a tightening cycle of its own.
However, last week, the central bank opted to keep rates on hold to boost corporate demand and consumer confidence, which has shown signs of declining in response to higher lending rates.
Clearly, banks have no qualms in passing on higher rates to customers everytime the RBI increases the repo rate In fact, in anticipation of a rate hike last week, banks like the State Bank of