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- October 2019
Index
Toppers Talk
Art & Culture
Polity
- Right to access internet is fundamental right declares Kerala High Court
- Legal rights of Deities in India, Difference in Natural and Juristic Person
- Bru refugees refuse to return to Mizoram
- No animal sacrifice in Tripura temple-Orders High Court
- EC’s Order on Reducing Sikkim CM’s Disqualification Period
- Law Ministry issues corrigendum to Jammu and Kashmir Reorganisation Act
- Appointment of the Judges in India.
- New Chief Justice of India- How is CJI appointed?
- Indian Penal Code 1860, HM Amit Shah wants to Overhaul IPC
- National Population Register (NPR) 2020
- Whistle Blowers Allegations on Infosys
Governance & Social Justice
- 60% girls in Delhi colleges anaemic
- Niti aayog’s School education quality index
- Multipurpose National Identity Card
- Population pyramid : India Vs China, Demographic dividend Phase of India
- UN Population Report, India will become the most populous country by 2027
- Supreme Court upholds SC and ST (Prevention of Atrocities) Amendments Act
- Comparing Population Pyramids of India and China
- Waqf boards-Their governance and purpose
- Harvard Admissions Case
- Pradhan Mantri Jan Arogya Yojana- Ist Anniversary, Problems and solutions
- Significance of sexual and Reproductive Health-Status of reproductive services in India
- Pregnancy in Old Age, What is In Vitro Fertilisation-Risks and legal shortcomings
- Supreme Court Judgement on NGOs and RTI
- Social Stock Exchange
- Rajasthan Govt changes EWS norms, Sets Rs 8 lakh family income as only criteria
- Global hunger index 2019
- No Government job for those with more than two kids
- Ranitidine CANCER risk
- IIT Council Introduces Tenure track system
International Relations
- Bangladesh growing faster than India ?
- Cyprus dispute explained
- Donald Trump impeachment
- India wins Hyderabad Nizam case against Pakistan
- India’s reply to Pakistan at UNGA
- Prime Minister of Malaysia calls India and invader in Kashmir
- Should India recognise the armenian genocide ?
- Why are CARICOM countries important for India ?
- Why are countries leaving OPEC ?
- Attacks on Saudi Oil facilities
- Organization of Islamic Cooperation issues statement on Jammu and Kashmir
- Sri Lanka’s relations with India & China
- US troops start pullout in Syria as Turkey prepares for operation
- What are Vanilla Islands?
- India-USA trade deal
- UNHCR Nansen Refugee Award-2019
- Modi – Xi Informal meet at Mamallapuram – Historic Chinese links
- India China informal summit in Tamil nadu
- Pakistan save from FATF blacklist till 2020
- USA blacklists China organisations over Uighur Muslim abuse
- Why is Chile burning ?
- Why is the Philippines important for India
- Xi jinping Nepal visit 2019 and impact on India
- India Pakistan Cross LOC Trade suspended, Should India revoke suspension?
- Protests in Lebanon
- Chennai to Vladivostok Sea Route
- End of baghdadi
- Indian government’s security advisory
- Indians no longer require Visa to visit Brazil
- Non Aligned Movement 2019 summit
- US backed Ceasefire between Turkey and Kurds
- Pakistan stops postal exchange with India
- China’s GDP growth slows to 6% slowest in 27 years
- Common Goods for Health project by WHO
- Turkey attack Kurds in Syria
Geography
Economy
- Behavioural Aspect of Farmer Suicide
- Is rural India really open defecation free ?
- Global Growth Slow Down
- Nobel Prize in Economics 2019
- Regional Comprehensive Economic Partnership
- SBI wrote off bad loans worth 76,000 crores
- Surge in Onion Price
- Agriculture Credit by RBI’s Internal Working Group
- What is Debt to GDP Ratio?
- Yes Bank Crisis
- Nobel prize in Literature – Controversy
- Boosting Indian Exports
- Sopore Fruit Mandi deserted
- What is Pink Collarisation?
- Mizoram to have Broad Gauge railway line by 2021
- Demand downturn in Indian Economy
- Payment facilitation fund
- Participatory Guarantee Scheme
- RBI’s 4th Bi-monthly Monetary Policy 2019-20
- Tourism restrictions lifted in Kashmir
- Link between Jobs, Farming, and Climate
- Draft Social Security Code 2019
- State Tax Revenues, SGST and Central Tax Devolution are likely to fall short
- Competitiveness Index 2019 by World Economic Forum
- NITI Aayog’s Water Resources Strategy
- BSNL and MTNL financial issues-DoT prepares Rs 74000 crore revival plan
- 20th Livestock Census
- India falls 10 ranks in World economic forum’s Global competitiveness index
- RBI stops Printing Rs 2000 Notes
- What is the Unified Approach proposal of OECD?
- FCI granaries overflowing
- India’s Economic Growth 2019
- Financial Sector Scams in India
- Labour Market of India
- New Strategic Disinvestment Process
- Payment Delays to Sugarcane Farmers
- Why India’s IMF Quota is not increased
- What is monetary policy Transmission? Why banks are not reducing interest
- Mahatma Gandhi’s theory of Economics
- India moves up 14 spots to 63 on world Bank ease of doing business index
- New amendments to the Motor Vehicles Act
- Power Sector Scenario in India
- Telecos to Pay Rs 96,642 crore to the Government
- Camel population declines in Rajasthan
- Merger of BSNL and MTNL
- World bank on Indian economy
Defence & Security
- Nagas Kukis Conflict, What is the cause of the latest tensions?
- Case against 50 Celebrities controversy
- Can Indian Government intercept WhatsApp?
- UP Government fires 25000 home guards, Is Yogi Government’s decision justified?
- NCRB’s Crime in India 2017 report
- Aadhaar Social Media mandatory linking case
- What is TechSagar? National repository of India’s cyber tech capabilities.
Disaster Management
Science & Technology
- ISRO’S Project NETRA
- Facebook’s LIBRA Currency in trouble
- WHO launches first World report on Vision
- 2019 Nobel prize in physics
- 2019 Nobel prize in Physiology and Medicine
- Elon musk’s starlink project
- NASA’s ICON mission
- New King of the Moons in the Solar system is Saturn
- What Is Spectroscopy ?
- Quantum supremacy
Environment
- Climate Vulnerable Mapping Of India
- C40 Cities
- Gujarat Unveils emission trading scheme
- Forest Plus 2.0
- Himalayan States seeks Green Bonus
- India to Phase Out Single Use Plastic (SUP) by 2022
- Role of Volcanoes in Global Warming
- NH 766 ban controversy, Protests in Kerala against night traffic ban on the forest stretch
- Climate Change needs Global Solution
- Aarey Forest -2185 trees to be cut for Mumbai metro
- Government to build 1400 km long Green wall
- Graded Response Action Plan in Delhi
- Aerosol formation brightening clouds
- Anthrax outbreak in Pobitora Wildlife Sanctuary, Two affected buffaloes died
- Species in News from June to October 2019
- Climate Action Summit 2019
Prelims bits

Tag:GS-3||Economy|| Banking & Financial Sector||RBI
What is the issue?
- Since February 2019, the Reserve Bank of India (RBI) has aggressively cut the repo rate.
- But, monetary policy transmission had not taken place, with banks’ lending rates not proportionally coming down.
What is “monetary policy transmission”?
- Repo rate is the interest rate that the RBI charges the banks when it lends them money.
- The banks’ lending rate is the interest rates that banks charge from customers when they take a loan.
- By cutting the repo rate, the RBI has been sending a signal to the rest of the banking system that the lending rates in the system should come down.
- This process of repo rate cuts leading to interest rate cuts across the banking system is called “monetary policy transmission”.
How is this working in India?
- Inefficient
- In India, the process of monetary policy transmission is rather inefficient.
- At no time in the past has monetary transmission been better than 50% (only half the rate cuts by RBI were passed through by the banking system).
- Between February and August 2019, the RBI cut repo rate by 110 basis points from 6.5% to 5.4% [100 basis points make a percentage point]
- Lending rate down only by 29 BPS
- But, the interest rate charged by banks on fresh loans that they extended during this period fell by just 29 basis points.
- This is just 27% of the amount by which the repo rate came down.
What was RBI’s response?
- Rate cut: In response to the sluggish transmission, the RBI decided to cut the repo rate by another 25 basis points in October 2019.
- RBI urged banks to link the RR and LR
- It urged banks to link their lending rates to the repo rate.
- Yet, for the most part, the banking system has ignored the signaling.
- Only some banks have reduced lending rates on new loans by 10 basis points.
- Indeed, even though it is counter-intuitive, interest rates on existing loans have actually gone up by 7 basis points.
How does lowering interest rates help?
- Economic growth
- Since February 2019, India’s economic growth momentum has rapidly decelerated.
- Projections of GDP growth rate have come down from roughly 7.2%-7.5% in February to 5.8%-6.0% in 0ctober 2019.
- In this context, there are two key problems in the economy:
- People are not consuming at a high enough rate
- Businesses are not investing in existing or new facilities
- A lower interest rate regime is expected to help in resolving both of these.
- Consumption– The prevalent argument is that if banks reduce their lending rates, they would also have to reduce their deposit rates.
- Reducing deposit rates will, in turn, incentivize people to save less and spend more i.e. increased consumption.
- Deposit rate is the interest rate banks pay when consumers park their money in a savings bank deposits or a fixed deposit.
- Investment– The low investment by businesses is partly because they have unsold inventories because people are not buying as much.
- But, part of the reason is also that the interest rate charged on loans is quite high.
- If interest rates are lowered, more businesses are likely to be enthused to borrow new loans for investment.
- This is particularly fitting as the government has recently cut corporate tax rates in the hope to boost investment and the corporate sector’s profitability.
- So, given that overall retail inflation too has been well within the comfort zone of 4%, the RBI’s decision to cut repo rates was a justified move.
Why are banks not reducing interest rates?
- Less impact on overall cost of Funds
- Repo rates have little impact on a bank’s overall cost of funds.
- Reducing lending rates just because the repo rate has been cut is not feasible for banks.
- This is because for banks to be viable there must be a clear difference between the lending rate (charged on loans) and the deposit rate (given on deposits).
- The difference between the two has to be not only positive but also big enough for the bank to make profits.
- Deposits
- Notably, to attract deposits, banks pay a high deposit rate.
- Such deposits make up almost 80% of all banks’ funds from which they then lend to borrowers.
- On the other hand, banks borrow a minuscule fraction from the RBI under the repo.
- So even sharply reducing the repo rate does not change the overall cost of funds for the banks.
- In effect, unless banks reduce their deposit rates, they will not be able to reduce their lending rates.
- However, if a bank were to reduce its deposit rates, depositors would shift to a rival bank that pays better interest rates.
- Otherwise, they would park more of their savings in small saving instruments (public provident fund, Sukanya Samriddhi Yojana, etc) that pay much higher interest rates.
- Term deposits
- Also, 65% of total deposits are “term” deposits (fixed for certain duration) and take, on average, up to 2 years to get repriced at fresh rates.
- So, banks cannot always reduce deposit rates immediately as deposits take longer to get repriced.
- Moreover, if banks are under pressure to reduce the interest rate they charge on new loans, they could possibly push up the interest rates on old loans that allow for such flexibility.
How does it work in developed countries?
- Developed and Diversified financial system
- In developed countries, the financial system is far more developed and diversified.
- Most importantly, the banking system there does not have to bear the burden of providing loans to everyone in the economy.
- Corporate bond market
- Most demands for big loans are directed towards the corporate bond market.
- Here, a company floats bonds and borrows money from the public by paying whatever interest rate the market demands.
- Moreover, depositors are not in the habit of getting a fixed interest rate on their savings while expecting a variable interest rate on their loans.
Way forward
- At the current low levels of per capita income, the savers are far more risk-averse in India and unwilling to invest in higher-risk instruments other than bank deposits.
- For a repo-linked regime to work, the whole banking system in India would have to shift to that.
- In other words, along with banks’ lending rates, their deposit rates too must go up and down with the repo.
- But if such a regime were in place, depositors would have earned 1.10 percentage points less interest rate on their savings account.
- So, in many ways, linking the lending rate to the repo rate is not a viable option.
Mains model question
- What is the repo rate? Why set the repo rateas a benchmark for lending?
References