Pass on the Rate Cuts to Consumers – Directs RBI Governor to Banks

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While reviewing the regular monetary policy, RBI has not changed reverse repo rate from 6.75 % and has also maintained Cash Reserve Ratio at 4%.

But at the time of announcement, RBI Governor, Raghuram Rajan has warned all Banks in India to pass on the rate cuts meticulously to the Consumers. He has told that since 1st of January, 2015 till date RBI has cut 1.25 % rates, but the Banks have just passed on almost 50 % of the benefit of such rate cut to the consumers.

“Indian Economy is truly on the recovery mode but if the rate cuts are not passed on to the consumers, the impact of such rate cuts shall be minimal”, feels RBI Governor.

Bankers have been calculating Benchmark Base rates on the basis of ‘Cost of Funds’ whereas RBI wants the Banks to set Base Rates on the basis of “Marginal Cost of Funds”. Banks have already cut the deposit rates by more than the lending rates.

RBI is in dialogue with the Central Government to change the norms of calculation of Base Rate by Banks from Cost of Funds to the method of Marginal Cost of Funds, so the Banks shall have to change their base rates accordingly.

From the following table it is evident that major Banks have not changed their base rates in accordance with the RBI’s reduction of repo rates and reverse repo rates:

Bank Base Rate as on 01-01-2015 Base Rate as on 01-12-2015 %age Reduction
Axis Bank 10.15 9.50 0.65
Bank of Baroda 10.25 9.65 0.60
Bank of India 10.20 9.70 0.50
Canara Bank 10.20 9.65 0.55
HDFC Bank 10.00 9.35 0.65
ICICI Bank 10.00 9.35 0.65
Kotak Mahindra Bank 10.00 9.50 0.50
Punjab National Bank 10.25 9.60 0.65
State Bank of India 10.00 9.30 0.70
Union Bank of India 10.25 9.65 0.60
RBI’s Reverse Repo Rate  8.00  6.75  1.25

RBI has projected to maintain the growth rate of Indian Economy at 7.4% for the Fiscal Year 2015-16. The inflation rate may come down to 5% by March 2017.

Author: Lalit Virmani (Author is an Ex-Banker (Retired Executive from a Leading Nationalized Bank) presently a Finance Consultant)You may contact the author at

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