RBI monetary policy review: With inflation easing and investment and consumption demand weakening, the Reserve Bank of India (RBI ) today is expected to cut interest rates for the third time this year.
A recent report by Deutsche Bank says the central bank will have to trim policy rates to push banks to cut lending rates as the transmission has been disappointing so far — the RBI has cut the repo rate by 50 bps since January, but banks have lowered their base rate by only 15 bps.
Banks are reluctant to reduce lending rates as there is uncertainty around credit quality and there is persistent liquidity tightness in some specific areas of the financial system.
A Reuters poll showed 35 of 48 economists expected the RBI to cut the repo lending rate by a quarter percentage point to 7.25 per cent after lowering it by the same amount in January and again in March. Three expected a 50 basis point cut.
The central bank made it clear that banks will need to first cut their lending rates in response to the previous policy rate easing, and only then further policy rate cuts will be entertained. The push from RBI and the eventual improvement in the money market liquidity position, eventually led some of the key banks to cut the lending rates by 13-25 bps in April, thus satisfying one of the pre-conditions set by RBI for easing rates further.