RBI Guv Raghuram Rajan taking a closer look at rate transmission issue

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Mumbai | Updated: Mar 08, 2015 8:03 AM

The Reserve Bank of India has decided to look into the issues delaying the transmission of interest rate cut...

Raghuram Rajan, Reserve Bank of India, RBI, RBI rate cut, RBI interest rateAccording to Raghuram Rajan, the liquidity stance has been fairly accommodative. (Reuters)

The Reserve Bank of India has decided to look into the issues delaying the transmission of interest rate cut by banks to customers.

RBI governor Raghuram Rajan has said the RBI is “examining whether there are any institutional constraints in passing on these rate cuts. We as you know have made changes to the base rate determination policy and we will be examining this very carefully to understand whether it is working as effectively as it should.”

After the 25 basis points cut on January 15, 42 out of 45 banks did not announce any reduction in lending rates. They have not cut deposit rates either, with the leader SBI last cutting deposit rates in December.

Many banks expressed the hope to pass on the second 25 bps repo rate cut earlier this week, but are yet to make any concrete announcement. While banks have made the right noise with Indian Banks Association chairman TM Bhasin saying “since there is a lag effect for the monetary transmission to take place, effect of previous 25 bps cut together with the present rate cut would encourage banks to review their base rates”, most banks have not even reduced their deposit rates to a level that will allow them enough leeway for a lending rate cut.

“My hope is that over the span of the next few weeks … remember, March is typically a time when banks try and hold liquidity. But as we move into the new fiscal year, we will see more transmission into lower interest rates,” Rajan had said in a conference call this week.

According to Rajan, the liquidity stance has been fairly accommodative. “But also I think that what happens is the process of transmission is somewhat asymmetric, that banks tend to be a little faster in raising rates rather than cutting rates. I have no doubt that the pressure of these two rate cuts over time will feed into lower rates,” he said.

The RBI had recently changed the method of calculation of base rate for faster transmission of rates. Banks can review their base rate calculation method every three years instead of the earlier-specified five. The RBI which introduced the base rate system in 2010 had said banks can calculate base rate by taking the average cost of funds or marginal cost of funds or by any other reasonable method.

As per the latest RBI decision, bank’s internal pricing policy must spell out the rationale for, and range of, the spread in the case of a given category of borrower, as also, the delegation of powers in respect of loan pricing. This rationale must be available for supervisory scrutiny.

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