The Reserve Bank of India (RBI) has made it mandatory for banks to link all of their new loan products, be it personal, housing or auto to an external benchmark like the policy repo rate.
About:
RBI has issued a circular saying that banks will have to link their products to an external benchmark with effect from 1st October 2019.
Banks can also choose any benchmark market interest rate published by Financial Benchmarks India Private Limited (FBIL) or the government’s 3-month and 6-month treasury bill yields published by FBIL as their preferred external benchmark.
Comment:
According to RBI, this has been done because the transmission of policy rate benefits under the current framework has not been satisfactory. Banks have been reluctant to cut interest rates despite the RBI lowering the repo rate by 110 basis points (bps) between February and August.
This move – aimed at faster transmission of monetary policy rates – is likely to cheer borrowers as banks will now be forced to pass the entire rate cut benefit announced by RBI in recent months and offer lower interest rates.
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