an in in ndia 12.9
the other, and blurred the attempts of bringing (iv) Besides the existing repo route, term
in transparency in the lending business. For the repos have been introduced for three set
same reason, it was also difficult to assess the of tenors—7, 14 and 28 days.
transmission of policy rates (i.e., repo rate, reverse (v) RBI is progressively reducing banks’
repo rate, bank rate) of the Reserve Bank to lending access to overnight liquidity (at the fixed
rates of banks. The Base Rate system is aimed at repo rate), and encouraging the banks to
enhancing transparency in lending rates of banks increase their dependency on the term
and enabling better assessment of transmission of repos. By March 2016, banks were
monetary policy. allowed to borrow only up to 1 per cent
After its deregulation by the RBI in 2010, of their NDTL from the Call Money
banks fix their own base rates. Thus, in practice Market—0.25 per cent through repo and
base rate shows differentiation—changing from the rest of 0.75 per cent through term repo.
bank to bank according to differentiation in the This aims to improve the transmission of
operational costs of the banks. Banks are not policy impulses across the interest rate
allowed to offer any loan below their base rates. spectrum and providing stability to the
By March 2017, the base rate of the banks were loan market.
in the range of 9.25 to 9.65 per cent18. (vi) As per the Union Budget 2016-17,
By the fiscal 2015–16, several new initiatives individuals will also be allowed by the
were taken by the RBI in the area of credit and RBI to participate in the government
monetary policy management—major ones are security market (similar to the developed
being given below: economies like the USA).
(i) Transition to a bi-monthly monetary
(ii) Recognition of the glide path for From the financial year 2016-17 (i.e., from 1st
disinflation (recommendation of Urjit April, 2016), banks in the country have shifted
Patel Committee report implemented). to a new methodology to compute their lending
Under it, the CPI (C) is used by the rate. The new methodology—MCLR (Marginal
RBI as the “Headline Inflation” for Cost of funds based Lending Rate)— which was
monetary management. articulated by the RBI in December 2015. The
(iii) A Monetary Policy Framework has been main features of the MCLR are—
put in place – an agreement in this regard it will be a tenor linked internal
was signed between the Government of benchmark, to be reset on annual basis.
India and the RBI late February 2015. actual lending rates will be fixed by adding
Under the framework, the RBI is to ‘target a spread to the MCLR.
inflation’ at 4 per cent with a variations to be reviewed every month on a pre-
of 2 per cent. It means, the ‘range of announced date.
inflation’ is to be between 2 to 6 per cent existing borrowers will have the option to
(of the CPI-C). move to it.
18. Reserve Bank of India Bi-monthly Credit & Monetary banks will continue to review and publish
Policy, February 2017. ‘Base Rate’ as hitherto.