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After opening the day on a flattish note, the Indian indices registered losses and went on to trade in the red. Sectoral indices are trading on a negative note with stocks from the metal, auto, and telecom sector witnessing maximum selling pressure.
The BSE Sensex is trading down 88 points (down 0.4%) and the NSE Nifty is trading down 25 points (down 0.3%). The BSE Mid Cap index is trading down by 0.6% and the BSE Small Cap index is trading down by 0.5%. The rupee is trading at 66.58 to the US$.
As per a leading financial daily, private sector lender Yes Bank has cut its marginal cost of funds based lending rate (MCLR) by 0.10% across tenors. With this, the lender's one year MCLR will now be at 9.5% as against the earlier 9.6%.
This move comes a day after the country's largest lender State Bank of India (SBI) cut its MCLR by 0.05%.
The revision in MCLR rates is seen as banks are trying to keep up with competition since the introduction of the new system last month.
The introduction of the MCLR has been in effect since April 1, 2016. The MCLR mechanism is introduced to ensure effective transmission of policy rates. The RBI has suggested banks review their lending rates frequently, and reflect changes in their cost of borrowing.
MCLR is computed based on banks' marginal cost of borrowing, or incremental cost of funds. This is as against the computation based on the average cost of funds that banks have used so far.
What this means is that if a bank's cost of borrowing is 8% now but tomorrow the incremental cost of funds becomes 7.5%, the marginal cost of borrowing for the computation purpose will be 7.5%, rather than the average of the two.
With this regime in place, a fall in deposit rates will be quickly reflected in the lending rates. Also, a rise in deposit rates would mean lending rates going up quickly too. In all, the process will mean quick transmission of policy rates by banks.
Going by the past experience, the direct correlation between RBI cutting the repo rate and banks passing on that cut at the same rate in the form of lower lending rates, is rather weak.
The reason why banks are not willing to cut their lending rates is because it will reduce their income from interest charged. Further, the concern is that public sector banks (PSUs) are staring at a huge amount of corporate bad loans. And in order to handle this, banks are hoping to make a greater profit by cutting their deposit rates, but not cutting their lending rates at the same rate. The above MCLR regime will surely turn this play around.
Moving on to news from commodity markets. Gold futures are witnessing selling pressure. This is seen as the dollar rebounded against a basket of major currencies. Further, some Federal Reserve officials pointed to the possibility of two interest rate hikes in 2016. This announcement also weighed on the yellow-metal. Investors are now looking ahead to Friday's closely watched April US jobs report for further cues.
A recent article form Vivek Kaul's Diary titled 'Has Gold Entered a New Bull Market?' shares some interesting insights on the movements in gold prices.
To keep a regular tab on the movements in gold prices and other commodities, you can read weekly market commentary from the Daily Profit Hunter team. Their weekly commentary tracks the developments in the global economy as well as equity, currency and commodity markets.
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