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RBI retains short term rates

The Reserve Bank of India has kept short-term bank rates unchanged. And manufacturers in the capital-intensive knitwear sector have hailed the decision. The repo rate was cut by 25 basis points during the monetary policy review in April. But they say banks should reduce the base rates proportionately in tandem with the reduction in credit policy repo rates, which did not happen on the previous occasions when the repo rates were cut.

The apex bank has kept the policy repo rate (the rate at which RBI lends to commercial banks) under the liquidity adjustment facility unchanged at 6.5 per cent and the cash reserve ratio at four per cent of the net demand and time liabilities.

There is also an opinion that the RBI should effectively monitor the calculation of base rates to ascertain whether the banks use only the marginal cost of funds method. Presently there is no transparency in the banking system for consumers to understand how the base rates are fixed by various banks after every reduction in the short-term bank rates announced by RBI. Without the proper transmission of the rates, especially in the case of older loans, consumers are not going to get loans at lower interest rates.