RBI to link base rate with MCLR from 1 April

RBI to link base rate with MCLR from 1 April
09/02/2018 , by , in News/Views

The Reserve Bank of India (RBI) on Wednesday said it will link the base rate for loans with the marginal cost of funds-based lending rate (MCLR) from 1 April to improve monetary policy transmission.

This is likely to narrow the gap between the base rate and MCLR, and benefit borrowers who are still using the base rate, said some analysts.

However, with details of the methodology due only next week, others saw it as just a phasing out of the base rate system. Speaking at the post-monetary policy press conference, RBI deputy governor N.S. Vishwanathan clarified that the two rates would be “harmonized and not equalized”.

The central bank expressed concern that a large portion of bank loans remain linked to the base rate despite the introduction of the MCLR in April 2016. Weak monetary transmission during a rate cut cycle has been one of the central bank’s pet peeves.

The MCLR is more sensitive to monetary policy transmission and is closely linked to the actual deposit rates. MCLR is calculated on the basis of incremental cost of funds, making it a more reliable benchmark rate as compared to the base rate, usually calculated by taking into account average cost of funds. For instance, since April 2016, while the repo rate has been reduced by 75 basis points, State Bank of India’s base rate has come down by 65 basis points but the one-year MCLR by as much as 1.25 percentage points. One basis point is one-hundredth of a percentage point.

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