Banks likely to reduce interest rates after RBI’s repo rate cut

With the RBI’s 50 basis points cumulative reduction in policy rates since February this year, transmission of the rate cut by banks is expected in the coming quarters, according to an SBI report.

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The report also points out that following the RBI’s 25 basis point cut in repo rate in February, public sector banks reduced deposit rates by 6 basis points, and foreign banks reduced 15 basis points, while private banks increased the rate by 2 basis points. The analysis of the weighted average lending rate (WALR) on fresh loans versus the repo rate reveals that WALR for public sector banks and scheduled commercial banks (SCBs) closely follow the adjustments in the policy rate, implying an effective and timely transmission mechanism.

The report also points out that on the regulatory and development policy front, the RBI has decided to widen the option for managing stressed assets. It is proposed a new market-based framework for securitisation of stressed assets.

The expansion of co-lending to all regulated entities is a welcome move, but exact details are needed to gauge the impact and the scope of this new arrangement, the SBI report states.