Waiting For Cheap Loans

Why the RBI’s repo rate cuts have not translated into lower interest costs for borrowers.

- Renu Yadav

Though the Reserve Bank of India (RBI) has cut its benchmark rate several times this calendar year—by a total of 75 basis points, or 0.75 per cent—potential borrowers who have been waiting for a corresponding fall in interest rates will have to wait longer. According to an RBI policy statement issued on June 20, though the repo rate (the rate of interest the central bank charges commercial banks for loans) was cut by 0.5 per cent between February and April this year, banks passed on less than half that benefit to consumers in the same time period, with the weighted average lending rate for new loans reducing by only 0.21 per cent. Though this is a disappointing turn of events, there are some structural reasons that have prevented banks from passing on the benefit of RBI rate cuts to borrowers.

THE COST OF FUNDS