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RBI to see full pass through of previous rate cuts before taking any action

The Reserve Bank of India justified its decision to pause its policy rate action by maintaining the repo rate at 5.15 per cent. This was not in line with the market consensus which expected a 25 bps (one bps is 0.01 per cent) reduction of the benchmark policy repo rate by the central bank. Spike in inflation was one of the main reasons for not doing so.

, ET Bureau|
Dec 05, 2019, 05.11 PM IST
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Agencies
RBI
Monetary transmission has been full and reasonably swift across various money market segments and the private corporate bond market.
The central bank is in no hurry to keep reducing interest rates that could end up being wasted. But it would work to ensure that the transmission turns more effective since much needs to be passed on.

The Reserve Bank justified its decision pause its policy rate action by maintaining the repo rate at 5.15 per cent. This was not in line with the market consensus which expected a 25 bps (one bps is 0.01 per cent) reduction of the benchmark policy repo rate by the central bank.

“Several measures already initiated by the government and the monetary easing initiated by the Reserve Bank since February 2019 are gradually expected to further feed in the real economy” said RBI governor Shaktikanta Das at its post policy media briefing on Thursday. “ The impact of external benchmarking by bank will further play out in the coming days and months”

The central bank expects that the forthcoming union budget will also provide better insight into further measures to be undertaken by the government and its impact on growth.” Against this backdrop, the MPC judged that there is monetary policy space for further action, but it felt appropriate to take a pause at this juncture” Das said.

“ RBI wishes to see the lagged impact of its front-loaded 135 basis point cut in the policy rate along with some of the slew of fiscal measures plays out for future growth “ said Abheek Barua, chief economist HDFC Bank.

Monetary transmission has been full and reasonably swift across various money market segments and the private corporate bond market. As against the cumulative reduction in policy repo rate by 135 bps during February to October this year, transmission to various money market and corporate debt market segments ranged from 135 bps with respect to overnight call money market to about 218 bps with respect to month CPs of NBFCs, according to RBI.

Bu full impact on lending rates is still playing out. Till now it is 44 bps with regard to new loans. “Transmission is set to improve with the introduction of external benchmark system as most banks have linked their lending rates to the repo rate ” Das said.

Das highlighted that the timing of the rate cut is very important to optimise its impact adding that one must cut when the impact is maximum. It’s (135 bps cut) impact has to play out even more and the central bank could reach a position where it times the next decision in a manner that when a rate cut is undertaken, the impact should be optimised and maximised. “The timing is important rather than going on mechanically cutting rates on every occasion” Das said.

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