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RISING REAL LENDING RATE ROILING RBI RATE CUTS: REPORT

Focus: GS-III Indian Economy

Why in news?

Even after the Reserve Bank slashed key interest rates by 135 basis points (bps) in 2020 – the real lending rates have only gone up by 44 bps in spite of the nominal lending rates falling by 105 bps during the same period, says a report.

Highlights from the report

  • High lending rate can be a reason for the steeply falling credit flows, which conversely also point to a deeper GDP contraction, accentuated by the pandemic.
  • One of the positives is that rising M3 (money supply) growth creates room for lending rate cuts to the tune of 100 bps more.
  • While nominal MCLR has come off by 105 bps since March 2019 on RBI easing, the real MCLR has jumped by 44 bps, with core WPI inflation dropping to 0.8%.
  • Similarly, the weighted average lending rate (WALR) has eased 37 bps in nominal terms, while, the real WALR has shot up 147 bps.

What is WPI?

  • Wholesale Price Index, or WPI, measures the changes in the prices of goods sold and traded in bulk by wholesale businesses to other businesses.
  • Analysts use the numbers to track the supply and demand dynamics in industry, manufacturing and construction.
  • The numbers are released by the Economic Advisor in the Ministry of Commerce and Industry.
  • An upward surge in the WPI print indicates inflationary pressure in the economy and vice versa.

What is MCLR?

  • Marginal Cost of Funds-Based Lending Rate or MCLR is the minimum interest rate that a bank can lend at.
  • MCLR is a tenor-linked internal benchmark, which means the rate is determined internally by the bank depending on the period left for the repayment of a loan.
  • MCLR is closely linked to the actual deposit rates and is calculated based on four components: the marginal cost of funds, negative carry on account of cash reserve ratio, operating costs and tenor premium.
  • Under the MCLR regime, banks are free to offer all categories of loans on fixed or floating interest rates.

What is WALR?

  • The Weighted Average Lending Rate (WALR) of scheduled commercial banks, is the interest rate charged on all the outstanding loans of a bank.
  • Unlike, the MCLR, which is lower because it is for the newest borrower, the WALR is higher.

-Source: The Hindu

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