Cut interest rates soon, RBI tells banks

Governor Rajan says sooner the better as it will help the economy

GN Staff | April 7, 2015


#RBI   #Rahguram Rajan   #banks   #interest rates   #monetary policy  

Sounding impatient, Reserve Bank of India governor Raghuram Rajan on Tuesday made a harsh comment on the banks reluctance to lower consumer interest rates.

Rajan's harsh comments reflect the increasing impatience of the RBI with banks, who have not lowered lending raters despite the RBI slashing repo rate from 8 per cent to 7.5 per cent between January and March this year.

"Banks marginal cost of funding has fallen, the notion that it hasn't fallen is nonsense," Rajan said."Banks marginal cost of funding has fallen, they can borrow at the margin at 7.5%. There is plenty of liquidity in the markets," Rajan said. "There is an incentive for banks to lower rates in April as a high amount of liquidity would be released into the banking system," Rajan said.

Rajan said "when banks have to raise rates, they quote higher policy rates... Why don't they cut when policy rates go down."  He was speaking after releasing first bi-monthly report on monetary policy, 2015-16.

Urging banks to cut rates, Rajan said, "the sooner rate transmission happens, better it is for the economy." Rajan said that RBI's stance (on interest rates) has turned accommodative in January and it remains so.

Base rate, which is the minimum lending rate for retail consumers, continues to be in double digits. Lowering of base rate will boost demand for home and auto loans, which will drive consumer demand and help the economy.

According to Rajan, banks will be forced to cut lending rates due to competitive pressures."At some point the competitive pressures on banks will tell. Many corporations are borrowing directly from the market. I have no doubt, that this (transmission of rate cut) will happen, If it happens sooner, it is better for the economy, but banks have to make their own decision," Rajan said.

"What we (RBI) have to make sure from a regulatory perspective is that regulation does not standing in the way of cutting rates. Remember that the base rate does not seem to stand in the way of banks, when they raise the rate as a result of interest rate hike. It only seems to come in the way when interest rates are cut," Rajan said.

The RBI review says that outlook for growth is improving gradually. "Comfortable liquidity conditions should enable banks to transmit the recent reductions in the policy rate into their lending rates, thereby improving financing conditions for the productive sectors of the economy," RBI said.

RBI has even said that any further cut in rates will be contingent on banks passing on rate cuts. "Going forward, the accommodative stance of monetary policy will be maintained, but monetary policy actions will be conditioned by incoming data. The Reserve Bank will await the transmission by banks of its front-loaded rate reductions in January and February into their lending rates," the policy statement said.

In Tuesday's policy announcement, the RBI held repo rate unchanged at 7.5 per cent, as expected. Another key ratio, the CRR or cash reserve ratio, which is the amount of deposits lenders must keep with the RBI, was also left unchanged at 4 per cent.

"What we are waiting for is more information about the effect of weather disturbances and more information on the likelihood of reasonable monsoons," he said.

Rajan rules

    To issue priority sector lending norms by month end.

    Waiting to see transmission of interest rates.

    Next rate cut will depend on effective transmission of policy stance by banks.

    Timing of future cuts will depend on how much room we have.

    Banks over time will be forced to match markets and bring rates down.

    There has to incentive and willingness for the banks to move on rates.

    Exploring the possibility of corporates issues rupee bonds abroad.

    Must ensure small savings rate don't stand in way of banks lowering rates.

    Improved economic fundamentals will allow us to focus on domestic policy.

   Allowing well managed urban co-operative banks to issue credit card.
 

First Bi-monthly Monetary Policy Statement, 2015-16

The Monetary Policy Report – April 2015: Click here

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