RBI cuts repo rate, moves forward for smooth transmission

The Reserve Bank of India (RBI) in its third bi-monthly monetary policy trimmed the repo rate by 25 basis points. The effective repo rate now stands at 6%. The markets cheered the RBI’s decision and termed it as ‘well-timed and justified’.
 
However, borrowers would be happy only when commercial banks would pass on the benefits to end consumers by lowering interest rates on various loans. RBI, in its statement on developmental and regulatory policies on August 2, stated that it was not satisfied with the newly introduced Marginal Cost of Lending Rate (MCLR) system.
 
MCLR system was introduced in April 2016 primarily because the old base rate system was not as closely linked to deposit rates. RBI has constituted an internal study group to study the various aspects of the MCLR system from the perspective of improving the monetary transmission and exploring linking of the bank lending rates directly to market-determined benchmarks.
 
Since April 2016, RBI has cut the repo rate by 50 basis points, but since then it seems banks in the country have not cut their lending rates in line with this 50-bps repo rate cut. Surely, RBI’s study group would come up with a proper solution which would help the RBI for smooth monetary transmission.