Short-term cost of funds down, it's for banks to decide on rate cuts: Raghuram Rajan

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SummaryRBI raised the key policy rate by 25 bps to 7.75% while lowering the MSF rate to 8.75%.

The Reserve Bank of India on Tuesday raised the key policy rate by 25 bps to 7.75% while lowering the MSF rate to 8.75%. RBI governor Raghuram Rajan spoke to senior editors after the policy announcement.

Is this is a hawkish, dovish or neutral policy?

What we have said is that we have set interest rates at a level that we are comfortable with, given our expectation of how things will evolve. If data come in — which move us either towards a significantly higher inflation than what we expect or a significantly lower growth — we will take appropriate steps. What I am saying is that, at this point, we feel comfortable given our projections.

What will be the impact of today’s actions?

I think, in the short run, the cost of funds will come down. But that has been our point — that we want to reduce the cost of funds from the level they were raised to give the need for liquidity measures to stabilise the exchange rate. We want to bring it down from that to the higher level that is consistent with current conditions — higher than what it was before May 2013, but lower than where it is today. The rate framework is now normalised. It will be fully normalised when we move from MSF being the operational rate to the repo rate. Adding to the term repo facilities will help. But I don’t expect the rate to go from MSF to repo, overnight. For that, we will have to wait for market conditions (to stabilise). We will help that along, but at a measured pace.

Do you expect banks to ease rates in response?

It’s for them to take decisions. I think the banking system is competitive, we’ll see what they do. Cost of funds are higher than what banks would have expected in May 2013. However, the short-term cost of funds is coming down because we have cut MSF rate. That has an effect on the money market rates, on CD rates and it would bring down their cost of funding.

What factors will drive further normalisation of liquidity conditions?

Given that the liquidity measures were driven by the exchange factor, it would be a big factor. Once we are confident that the exchange markets are normal, I think at that point, we will feel confident returning to full normalcy.

Are we better prepared to deal with

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