Repo rate may be used as a benchmark for lending by the banks.

Most commercial banks in India are expected to choose RBI’s repo rate as the external benchmark to determine their lending standards, from April  The repo rate is the crucial policy measure of the Reserve Bank of India (RBI).

The banking regulator had proposed the banks to move to an external benchmark for loan pricing from April 1, a movement supposed to develop monetary transmission as lenders had, in the past, been seen unwilling to decrease lending rate.
Banks had 4 options from which to pick the external benchmark:  the 91-day treasury bill, the 182-day T-bill, the repo rate, or any other benchmark interest rate provided by the Financial Benchmarks India Private Ltd (FBIL).
“The repo rate is the most stable one as compared to the other options,” a chief executive said while explaining the reason behind the preference. A few other banks also validated that the repo rate is the fitting suitor for the external benchmark. At the instant, the repo rate is 6.25%.
The marginal cost of fund based lending rate (MCLR) is presently the benchmark for all loan rates. Banks typically combine a spread to the MCLR while assessing loans for homes and automobiles.
For the current benchmark, the central bank has mandated that the standard over the benchmark rate — to be determined by banks at the commencement of the loan — should remain stable over the life of the loan, except the borrower’s credit evaluation experiences an abundant change and as agreed upon in the loan contract.
If the lending rates are associated to the repo rate, any variation in the repo rate will instantly impact the home and auto loan rates, since RBI has mandated the spread to continue fixed over the life of the loan.
Various banks have questioned the move to shift to a new external benchmark for loan pricing on the grounds that their cost of funds is not linked to these benchmarks and that without a fall in the prices, it would not be feasible to alter the rates.
The subject came up for consideration repeatedly last week when RBI Governor Shaktikanta Das, accompanying with his delegates, reached the bank chiefs to discuss monetary transmission.
“Some of the banks have raised the issue once again during the meeting. The governor said he would look into the issue,” said a bank manager who attended the meeting.
Nevertheless, banks are not anticipating that the central bank will suspend the introduction of the new benchmark.