External benchmark may not help borrowers

Let market forces play their part in enabling competitive pricing and innovation by banks

Since the deregulation of lending rates in the mid-1990s, the Reserve Bank of India (RBI) has tried four different rate-setting mechanisms to provide consumers with the best lending rates. All these mechanisms so far have relied heavily on banks’ internal factors, like the cost of funds, to determine the lending rates. An internal committee set up by the RBI has now suggested linking bank lending rates with an external benchmark in a bid to increase transparency in the lending rate setting system by banks and quicken the monetary policy transmission. 

The committee has also acknowledged that rate-setting systems like base