Corporates to See Rate Cut Impact After 2 Quarters
The transmission of RBI rate cuts happens quickly in case of repo-linked benchmark rate
Mumbai: Despite two consecutive repo rate cuts by the Reserve Bank of India (RBI) and adequate liquidity infusion, banks have still not reduced the lending rates for companies. Unlike retail floating rate loans that are linked to the repo rate (the rate at which the central bank lends short term money to banks), companies have their loan contracts linked to the marginal-cost-of-fund-based-lending-rate (MCLR) and have not seen a reduction in their Equated Monthly Instalments (EMIs).
According to the recent data released by the RBI, one-year median MCLR has remained unchanged at 9 per cent in April and has remained at 9 per cent since November, except February when it rose to 9.05 per cent. This means MCLR borrowers have not seen a reduction in their EMIs. Nearly 36 per cent of all floating rate loans are priced on MCLR, while over 60 per cent are on external benchmarks (EBLR) like the repo rate or the 10-year government bond.
CS Setty chairman State Bank of India in his Q4FY25 earnings press conference told DC, “A reduction in MCLR will depend on what will be the incremental deposit rate cost coming down. Maybe we may see some MCLR movement after two quarters, that is what I believe.” Setty said that in case of SBI, of its total domestic loans, interest rate on about 31.77 per cent are linked to the MCLR while 29 per cent of the loans are linked to the external benchmark (repo rate).
The central bank has reduced policy repo rate by a total of 50 basis points since February and has infused durable liquidity to the tune of Rs 8.6 lakh crore since December 2024 to ensure effective transmission of policy rate cuts into both lending and deposit rate. Banking system liquidity currently has shifted to a surplus of ₹1.4 lakh crore in April (vs. ₹1.24 lakh crore deficit in March).
The transmission of RBI rate cuts happens quickly in case of repo-linked benchmark rate. The transmission in case of MCLR-linked rates, which depend on banks' deposit costs happen with a lag.
