RBI governor Raghuram Rajan has implied that banks may very well find another ‘excuse’ to not transmit earlier rate cuts to consumers. In his opening statement post the monetary policy review today, Rajan said, “Despite easy liquidity, banks have passed past rate cuts into lending rates only modestly. Earlier, some bankers said that it was the lack of liquidity that was holding rates high, now I hear from some that it is fear of the FCNR(B) redemptions that is making them reluctant to cut rates. I have a suspicion that some new concern will crop up once the FCNR(B) redemptions are behind us,” he said. “On our side, having examined our experience with the MCLR framework, we will shortly be suggesting some revisions. However, substantial pass through will happen only as corporate credit demand picks up, and public sector banks, strengthened by clean balance sheets, compete for corporate business,” Rajan added.
Even in his monetary policy review statement, incidentally his last, Rajan said, “Easy liquidity conditions are already prompting banks to modestly transmit past policy rate cuts through their MCLRs and pro-active liquidity management should facilitate more pass-through.” This is not the first time that Rajan has questioned banks for not transmitting rate cuts. “More monetary transmission to support the revival of growth continues to be critical. The government’s reform measures on small savings rates combined with the Reserve Bank’s refinements in the liquidity management framework should help the transmission of past policy rate reductions into lending rates of banks,” Rajan had said in his previous policy review.
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Raghuram Rajan in his last monetary policy review kept key rates, repo rate and CRR, unchanged at 6.5% and 4% respectively. Rajan sees multiple upside risks to inflation, and even though many domestic factors bode well for economic growth, his worries on the global economic front compelled him to maintain status quo. Rajan said, “In view of this configuration of risks, it is appropriate for the Reserve Bank to keep the policy repo rate unchanged at this juncture, while awaiting space for policy action. The stance of monetary policy remains accommodative and will continue to emphasise the adequate provision of liquidity.”