New norms to fix base rate: Rajan

As banks are yet to pass on the full benefits of rate cuts by Reserve Bank of India, the central bank said that it is working on a new way of calculating base rates based on marginal cost of funds.

“Our worry is that competition should not come in the way of banks passing on more lending rate cuts to customers. That is why we took a relook at base rates and that is why we are coming to the marginal cost pricing which would be announced later this week. That will give the banks the flexibility to move more quickly while the base rate would not allow the banks to move if they followed the average cost, that would not allow them to move quickly. The marginal cost will allow them to move much more quickly and react to the competition that is there in the market,” RBI Governor Raghuram Rajan said.

Quizzed on whether RBI was looking at scrapping base rate, Rajan, stating the example of Libor, said that the central bank was looking at a problem-free benchmark.

“The base rate forms the basis for your EMI and that is why you cannot scrap it. What is then going to take its place? There has to be something. Ideally we would have a market based measure which is sound, credible. Libor used to do it in the West but Libor has come under some cloud recently. We need a market-based benchmark which does not have such kind of problems,” Rajan said.

“We are in the process of creating one. There is a company which is collecting those rates. As we get some experience, we will get a market based benchmark. But till then we need some way of calculating and because people rely on this, they have to have a sense on how this is going to move. That is why we need to regulate this,” Rajan added.