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
                policy cycle.
         (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.