How external benchmarks can improve rate cut transmission - Hindustan Times
close_game
close_game

How external benchmarks can improve rate cut transmission

Livemint, New Delhi | BySunita Abraham, Neil Borate
Aug 27, 2019 07:56 PM IST

Banks in India have so far been using internal benchmarks, which have meant that the benefit of policy rate cuts don’t reach the borrowers completely.

Investment benchmarks serve as meaningful reference points that help investors draw comparisons of their funds’ or stocks’ performance. Similarly, in lending, a benchmark rate serves as a transparent reference rate used by financial intermediaries such as banks to determine the price at which they offer loans to customers.

In December 2018, RBI directed banks to use external benchmarks.(Reuters Photo)
In December 2018, RBI directed banks to use external benchmarks.(Reuters Photo)

A benchmark rate, typically, reflects the cost of borrowing funds for the lending institution. The interest rate at which banks are willing to lend will be at a spread to the benchmark rate, say benchmark rate plus 2%. Banks in India have so far been using internal benchmarks, which have meant that the benefit of policy rate cuts don’t reach the borrowers completely.

In December 2018, RBI directed banks to use external benchmarks. A number of banks such as SBI and Bank of Baroda have launched home loan products linked to RBI’s repo rate. The banks will charge a spread above the repo rate but the net interest rate will move in sync with the repo rate. This is expected to improve the transmission of RBI rate cuts.

Elevate your career with VIT’s MBA programme that has been designed by its acclaimed faculty & stands out as a beacon for working professionals. Explore now!

See more

Get latest updates on Petrol Price along with Gold Rate , Today Weather and Budget 2024 at Hindustan Times.

SHARE THIS ARTICLE ON
Share this article
SHARE
Story Saved
Live Score
OPEN APP
Saved Articles
Following
My Reads
Sign out
New Delhi 0C
Saturday, July 13, 2024
Start 14 Days Free Trial Subscribe Now
Follow Us On