The monetary policy committee of the Reserve Bank of India (RBI) will announce the repo rate today, April 5. It is expected that the regulator will keep the policy rate unchanged given falling inflation rate and rising bond yield. However, with increasing crude oil and commodity prices, it is expected that RBI will maintain its hawkish stand.

In the month of February, the Consumer Price Index (CPI) touched four-month low of 4.44 percent compared with 5.07 percent in January. The bond market has also reacted positively to the government announcement of a reduction in total borrowings during the first half of the financial year. Following the announcement the yield reduced by 29 basis point on the single day, which was otherwise rising since August 2017. Currently, a 10-year government bond is trading at 7.33 percent.

Repo Rate

RBI has reduced repo rate by 2 percentage points since the start of 2015. Following which several banks have reduced their lending rates. But the regulator has often complained that the banks do not fully transfer the benefits of rate cuts to their customers. For the smooth transmission of rates, the regulator implemented the new formula last year, applicable from April onwards, for calculation of lending rate called Marginal cost of funds based Lending Rate (MCLR).

The loans that are disbursed before, April 1, 2016, are linked with the base rate, which is calculated based on the average cost of funds. MCLR is calculated on the incremental cost of funds.  However, recently, RBI linked the base rate to MCLR, with effect from April 1, 2018, in order to harmonise the two rates.

Recently several banks have revised their lending rates. For example: State Bank of India, increased its base rate by to 8.70% per annum. Similarly, citing effective cost management initiatives, Allahabad Bank reduced its base rate by 45 basis points to 9.15 percent from the earlier rate 9.60 percent. In the private sector space, ICICI Bank increased its one-year MCLR to 8.30 percent (from 8.20 percent). HDFC Bank increased its one-year marginal cost of lending rate (MCLR) by 10 basis points to 8.3 percent.