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Base Rate is the interest rate below which Scheduled Commercial Banks (SCBs) will lend no loans to its customers—its means it is like prime lending rate (PLR) and the benchmark prime lending Rate (BPLR) of the past and is basically a floor rate of interest. It replaced17 the existing idea of BPLR on 1 July, 2010.
The BPLR system (while the existing system was of PLR), introduced in 2003, fell short of its original objective of bringing transparency to lending rates. This was mainly because under this system, banks could lend below BPLR.This made a bargaining by the borrower with bank- ultimately one borrower getting cheaper loan than the other, and blurred the attempts of bringing in transparency in the lending business. For the same reason, it was also difficult to assess the transmission of policy rates (i.e., repo rate, reverse repo rate, bank rate) of the Reserve Bank to lending rates of banks. The Base Rate system is aimed at enhancing transparency in lending rates of banks and enabling better assessment of transmission of monetary policy.
After its deregulation by the RBI in 2010, banks fix their own base rates. Thus, in practice base rate shows differentiation—changing from bank to bank according to differentiation in the operational costs of the banks. Banks are not allowed to offer any loan below their base rates. By March 2017, the base rate of the banks were in the range of 9.25 to 9.65 per cent18.
By the fiscal 2015–16, several new initiatives were taken by the RBI in the area of credit and monetary policy management—major ones are being given below:
(i) Transition to a bi-monthly monetary policy cycle.
(ii) Recognition of the glide path for disinflation (recommendation of Urjit Patel Committee report implemented). Under it, the CPI (C) is used by the RBI as the “Headline Inflation” for monetary management.
(iii) A Monetary Policy Framework has been put in place – an agreement in this regard was signed between the Government of India and the RBI late February 2015. Under the framework, the RBI is to ‘target inflation’ at 4 per cent with a variations of 2 per cent. It means, the ‘range of inflation’ is to be between 2 to 6 per cent (of the CPI-C).
(iv) Besides the existing repo route, term repos have been introduced for three set of tenors—7, 14 and 28 days.
(v) RBI is progressively reducing banks’ access to overnight liquidity (at the fixed repo rate), and encouraging the banks to increase their dependency on the term repos. By March 2016, banks were allowed to borrow only up to 1 per cent of their NDTL from the Call Money Market
—0.25 per cent through repo and the rest of 0.75 per cent through term repo. This aims to improve the transmission of policy impulses across the interest rate spectrum and providing stability to the loan market.
(vi) As per the Union Budget 2016-17, individuals will also be allowed by the RBI to participate in the government security market (similar to the developed economies like the USA).