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