In its last monetary policy review, held in early February, the RBI had introduced measures like long-term repo operations (LTRO) and external benchmarking of new floating rate loans by banks to medium enterprises. “The RBI would likely to hear us out on the progress being made in these areas. The assessment of the implications of the coronavirus outbreak may figure in our discussions,” a senior PSB official said.
The RBI had decided to conduct term repos of one-year and three-year tenors from the fortnight beginning February 15. The overall size of these LTROs is Rs 1 trillion. It has already conducted two auctions for Rs 25,000 crore each.
Since June 2019, the RBI has ensured that comfortable liquidity is available in the system to facilitate the transmission of monetary policy actions and the flow of credit in the economy. This was done to assure banks about the availability of durable liquidity at a reasonable cost based on the prevailing market conditions.
The RBI in its February policy review statement had stated: “The monetary transmission across various money market segments and the private corporate bond market has been sizable. The RBI has cumulatively reduced the policy repo rate by 135 basis points since February 2019. And, the transmission until the end of January was 146 bps in the overnight call money market. The transmission has been of 190 bps for three-month commercial papers of non-banking finance companies.”
Transmission to the credit market is also gradually improving. The one-year median marginal cost of funds-based lending rate (MCLR) declined by 55 bps during February 2019-January 2020. The weighted average lending rate (WALR) on fresh rupee loans sanctioned by banks declined by 69 bps and the WALR on outstanding rupee loans by 13 bps during February-December 2019.
After the introduction of the external benchmark system, most banks have linked their lending rates for housing, personal, and micro and small enterprises (MSEs) to the policy repo rate.
The monetary transmission has improved to sectors (retail and MSEs) where new floating rate loans have been linked to the external benchmark. Now, the pricing of loans to medium enterprises will also be linked to an external benchmark, effective from April 1, to strengthen monetary transmission.
During October-December 2019, the WALRs of domestic (public and private sector) banks on fresh rupee loans declined by 18 bps for housing loans, 87 bps for vehicle loans, and 23 bps for loans to micro, small and medium enterprises (MSMEs).