Since RBI introduced the base rate in 2010, Banks are not allowed to lend below that rate. Take a look at how banks have moved their rates in response to RBI rate hikes and cuts.
Source: RBI Lending Rates.
The above chart includes all banks, including foreign banks whose lending rates tend to be lower. Looking at just Indian banks, here’s the situation:
A few quick observations:
- Everyone pushed rates up immediately as RBI increased the Repo rate.
- On the way down, though, most banks have dithered, with only tiny decreases in their base rates.
- Private banks seem to hve responded better than public sector banks (though SBI is a big exception)
- Lastly, notice that the corridor between 8 and 9.5% is totally empty. In this rate corridor, much of the shorter term lending (less than 1 year) trades in the Commercial Paper market. Good companies even see long term bonds in this range (For example, a Sterlite 2023 bond today traded at 9.15%) So for corporates, it makes a lot more sense to issue CP or bonds than wait for banks to bring down their lending rates. Should this change happen significantly, we’ll see banks react immediately.
