For the effective transmission of the policy rate to borrowers, an Indian Reserve Bank (RBI) study group on Wednesday suggested that banks should switch to a new MCLR system interest rate calculation scheme existing.
The Study Group recommended that the T-Bill rate, the CDR rate and the RBI repo rate be more adequate than other interest rates to fulfill the function of an external benchmark.
“T-bill rates are risk free and also transparent. They also have a confidence-to-term money market curve. CD rates relate to the credit market directly in the sense that banks could meet their marginal need for funds in this market, a long-term money market curve, “the report said.
Given that the repo rate of the RBI has the main advantage that it is robust, reliable, transparent and easy to understand, according to the report, it reflects the appropriate rate for the economy at any time based on the Monetary Policy Committee ( MPC) assessment of macroeconomic conditions and prospects.
With the repo rate as the benchmark, the transmission of repo rate changes to the banks’ interest rates will be fast, direct and strong, he said. However, the repurchase rate as a benchmark may limit future changes in the monetary policy framework, since banks also have limited access to funds at the repo rate.