RBI Governor Raghuram Rajan today said it was "nonsense" to assume that cost of funds has not fallen and nudged them to reduce rates.
Severely critical of banks not passing interest rate cut to borrowers, the Reserve Bank of India (RBI) Governor Raghuram Rajan today said it was “nonsense” to assume that cost of funds has not fallen and nudged them to reduce rates.
He further said that sooner the banks cut rate the better it would be for the economy.
“We are not looking for a specific number (on the bank rate cuts) and saying unless this happens, nothing more will happen. But we want to facilitate the process of transmission.
“I do not see an environment where credit growth is tepid, banks are sitting on money and their marginal cost of funding (has) fallen, the notion that it hasn’t fallen is nonsense, it has fallen,” Rajan said.
He was referring to the reluctance of banks to pass on the benefit of 0.50 per cent rate cut announced by the central bank since January. The RBI lends to banks at 7.5 per cent.
“Given that there has been very little transmission from rate cut so far… we are waiting to see transmission take place… I have no doubt that this will happen. If it happens sooner it is better for the economy,” he told reporters after the announcement of first bi-monthly monetary policy.
In the first bi-monthly policy statement for 2015-16, Rajan maintained status quo but expressed hope that competitive pressure and comfortable liquidity position would encourage the banks to cut lending rates.
“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,” it added.
The RBI said that it would maintain accommodative stance of monetary policy going forward.
“The Reserve Bank will await the transmission by banks of its front-loaded rate reductions… into their lending rates,” the policy said.
Rajan, at the customary post-policy press conference, also said that there needs to be a “willingness” among the lending community to pass on the lower rates to the borrowers and help the economy achieve faster growth, and also questioned why the reflexes are faster when RBI hikes rates.
“The base rate doesn’t seem to stand in the way of banks raising the rates when interest rates are raised. It only seems to come in the way when interest rates are cut,” the Governor quipped angrily.
Conceding that every bank will take its own call on the matter of cutting rates, Rajan expressed confidence that they will cut the rates now that they are into a new fiscal and done with the busy season.
“I think the adjustment is a matter of time and given the amount of liquidity that is going to be released this month — March is a tight month, April is much less tight—I think there will be incentives to cut rates,” Rajan said.
The fact that large borrowers are going to other sources of credit beyond the bank lending, where the cost of credit is lower, will also force the banks to cut rates, he said.
Rajan also pointed out that many banks are active in purchasing certificates of deposits and stressed that if they are fine with parking their excess money for rates prevalent in the market, they should also be fine passing the same benefit to borrowers.
On the low deposit growth in the system, which is at a tad over 11 per cent and is at a multi-year low, the RBI Governor said there is some dis-intermediation going on and funds are not coming to the lenders. The banks will have to adjust to reclaim their share, he said.
“We are not looking for a specific number (quantum of the cuts by banks) and saying unless this happens, nothing more will happen,” Rajan said, explaining the rationale behind the status quo in policy rates.
When asked if its expectation of headline inflation at 5.8 per cent leaves it with any room to slash lending rate, given that he has expressed 1.5-2 per cent as the band for real interest rate, he replied in the affirmative.