The significant reduction in lending rate on personal housing and commercial real estate sector augurs well for the economy, as these segments are also employment-intensive, RBI Governor Shaktikanta Das said on Friday. While announcing the third bi-monthly monetary policy review, he said, the interest rate transmission has improved.
“The efficacy of RBI’s monetary policy measures and actions is reflected in the significant improvement in transmission during the current easing cycle. The reduction in repo rate by 250 basis points since February 2019, has resulted in a cumulative decline by 217 basis points in the weighted average lending rate (WALR) on fresh rupee loans,” he said.
The Governor also said that the reduction on lending rate has reduced the burden on households. “Domestic borrowing costs have eased, including interest rates on market instruments like corporate bonds, debentures, CPs, CDs and T-bills. “In the credit market, transmission to lending rates has been stronger for MSMEs, housing and large industries. The low interest rate regime has also helped the household sector reduce the burden of loan servicing,” he said.
The significant reduction in interest rates on personal housing loans and loans to the commercial real estate sector augurs well for the economy, as these sectors have extensive backward and forward linkages and are employment intensive, he added.
With regard to the shift from LIBOR as a benchmark for export credit, the Governor said the transition away from London Interbank Offered Rate (LIBOR) is a significant event that poses certain challenges for banks and the financial system. The Reserve Bank has been engaging with banks and market bodies to proactively take steps and the central bank has also issued advisories to ensure a smooth transition for regulated entities and financial markets.
In this context, it has been decided to amend the guidelines related to export credit in foreign currency and restructuring of derivative contracts, he said. “Banks will be permitted to extend export credit in foreign currency using any other widely accepted Alternative Reference Rate in the currency concerned.
“Since the change in reference rate from LIBOR is a “force majeure” event, banks are also being advised that change in reference rate from LIBOR/ LIBOR related benchmarks to an Alternative Reference Rate will not be treated as restructuring,” he said.