A day after saying that there is more fire power with the Reserve Bank to boost sagging growth, governor Shaktikanta Das Friday said future rate cuts will depend on the incoming data but warned that we cannot have lower interest rates like in advanced economies. Since February, the RBI has reduced repo rate by 110 basis points in four successive actions with the last one being an unconventional 35 bps, yanking down the policy rates to a nine-year low of 5.4 percent.
Thursday, Das had warned the government against any fiscal measures to boost the sagging economy given its limited fiscal space, said the RBI could still do more to spur growth given softer inflation, which is likely to remain under the targeted 4 percent over the next 12 months or so, giving it more legroom to pursue an easy money policy. “How much more we can go down (with the rate cuts)? We cannot go down to the levels of advanced economies. But how much we can go down will depend on the incoming data and other developments,” Das told an India Today event here. He said most of the advanced economies are having near zero inflation and therefore their rates are also low. “But our inflation target is 4 percent, and therefore, that should be the guiding force.” Das said as the full-service central bank, the RBI doesn’t have a specific view on what should be the real interest rates.
The governor also said RBI started noticing signs of slowdown in the economy from February and blamed the lowest growth rate in six years in the June quarter at 5 percent to the lower government spending. “If you see the MPC resolution…if you refer to my own minutes, we have clearly recognised that there are signs of growth slowing down. We started the cycle of interest rate cut as early as February, thus we can say we have been proactive and ahead of the curve,” he said.
On mandating banks to link their new retail loans to an external benchmark from October 1, he said fixing interest rates is left entirely to banks as we only say it has to be market-driven but banks have been given flexibility to fix it. “The RBI does believe that market forces should determine interest rates and the banks should be free to decide their interest rates,” the governor said, adding the external benchmark to be used by banks to link their lending rates are far more transparent than MCLR regime.
“Here each bank has the flexibility and full autonomy to decide what kind of spread they are going to have and that spread includes the components like cost of deposits, overhead cost and all other factors that go for the costing side,” the governor said. On September 4, the RBI mandated banks to link all new retail loans and loans to MSMEs to an external benchmark effective October 1. The loans can be benchmarked to repo rate or a three-year or six-month Treasury Bill or any other benchmark interest rate published by Financial Benchmarks India.