Repo went down, your EMI didn't: Here's why

Following the Reserve Bank of India's Monetary Policy Committee (MPC) decision to lower the repo rate, government officials are closely monitoring banks and lending institutions to ensure that the rate reductions implemented by the central bank are effectively passed on to consumers. A senior government representative stated that they will communicate with banks if the transmission of the rate cut is not apparent in the upcoming weeks. "There is no stipulated timeline. Each bank's asset-liability committee will take a call, but it should not be the case that there is no, or very marginal, benefit passed on," the official told The Economic Times.

Last week, the RBI announced a 0.25 percentage point reduction in the repo rate, marking the first decrease in five years, which could lead to lower interest rates on housing loans and other credit products. Under the leadership of the new RBI governor, Sanjay Malhotra, the MPC has set the repo rate at 6.25%. "The MPC remains unambiguously focused on a durable alignment of inflation with the target while supporting growth," he said.

Banks don't pass on the benefit

In 2019, after the central bank implemented a 25-basis-point cut, most financial institutions only transmitted approximately 5 basis points of this reduction, prompting a meeting between the Reserve Bank of India (RBI) and the banking sector.

The former RBI governor, Shaktikanta Das, underscored the importance of effective rate transmission following the cuts and expressed intentions to engage with banks regarding necessary actions.

The central bank had previously identified inadequate monetary transmission as a significant policy concern, highlighting its detrimental effects on the efficacy of policies aimed at influencing economic activity and inflation.

According to an analysis by Emkay Global Financial Services, although the liquidity deficit in the system has currently decreased to ₹70,000 crore, it is projected to worsen, potentially exceeding ₹2.5 lakh crore by the end of March unless further measures are implemented. "This implies that more measures are on the anvil if the RBI finds this level of deficit uncomfortable for policy transmission, especially as the depth of the cut cycle is still arguable," it noted.

The analysis suggests the repo rate reduction will affect margins (5-12 bps) for banks with higher floating or repo-linked loan portfolios.