The significant cut in lending rates for the personal residential and commercial real estate sector bodes well for the economy, as these segments are also labor-intensive, RBI Governor Shaktikanta Das said Friday. Announcing the third bimonthly monetary policy review, he said interest rate transmission has improved.
“The effectiveness of RBI’s monetary policy measures and actions is reflected in the significant improvement in transmission during the current easing cycle. The 250 basis point cut in the repo rate since February 2019 has led to a 217 basis point cumulative decline in the weighted average lending rate ( WALR) on new rupee loans,” he said.
The governor also said the reduction in borrowing rates has reduced the burden on households. “Domestic borrowing costs have declined, including interest rates on market instruments such as corporate bonds, bonds, CPs, CDs and T-bills. “In the credit market, the transfer to borrowing rates has been stronger for SMEs, housing and large industries. The low interest rate regime has also helped the household sector reduce the burden of repaying loans,” he said.
The significant cut in interest rates on personal housing loans and loans to the commercial real estate sector bodes well for the economy, as these sectors have extensive backward and forward links and are labour-intensive, he added.
Regarding LIBOR’s shift as a benchmark for export credit, the governor said the London Interbank Offered Rate (LIBOR) transition is a major event that poses certain challenges for banks and the financial system. The Reserve Bank has been in contact with banks and market bodies to take proactive steps and the central bank has also issued guidance to ensure a smooth transition for regulated entities and financial markets.
In this regard, it has been decided to amend the guidelines regarding foreign exchange export credit and restructuring of derivative contracts, he said. “Banks may grant export credits in foreign currencies using another generally accepted alternative reference rate in the relevant currency.
“Since LIBOR’s reference rate change is a ‘force majeure’ event, banks are also being informed that change in benchmark rate from LIBOR/LIBOR-related benchmarks to an alternative benchmark rate will not be treated as restructuring,” he said.