The Reserve
Bank of India (RBI) kept the
repo rate unchanged at 7.5% in its monetary policy review today, as per market expectations. The central bank left the Cash Reserve Ratio (
CRR) also untouched at 4%.
But there is something worth more concern that
RBI Governor Raghuram Rajan said in his statement that could have serious repercussions for
India Inc and the general public. According to Rajan, it takes three or four quarters for RBI's rate action to be transmitted through to the banks. This would mean lenders or the banks should be reducing rates by October, when loans are seen starting to pick up. This adversely means that raising capital for any big company expansion will most likely have to be put on hold till then. This also means that people who have loans, such as home loans, car loans, etc, will continue paying the high
interest rates till about October 2015.
The banks, barring a few state-run banks have largely abstained from tinkering their lending rates, given the volatility in the larger market indicators. However, the
Modi government has announced some
big bang announcement during the Budget in February 2015, and has been relying majorly on Rajan’s lowering of rates to start reflecting in the Banks’ lending rates, which would ensure the logjam in procuring
investments for the pending infrastructure projects would be cleared. But that seems unlikely for sometime now.
That said, Rajan, in his statement remained optimistic of the banks reducing lending rates. This is what he said
· "Transmission of policy rates to lending rates has not taken place so far despite weak credit off take and the front loading of two rate cuts. With little transmission, and the possibility that incoming data will provide more clarity on the balance of risks on
inflation, the Reserve Bank will maintain status quo in its monetary policy stance in this review," said Rajan in his statement.
· "The Monetary Policy Framework Agreement signed by the
Government of India and the Reserve Bank in February 2015 will shape the stance of monetary policy in 2015-16 and succeeding years. The Reserve Bank will stay focussed on ensuring that the
economy disinflates gradually and durably, with CPI inflation targeted at 6 per cent by January 2016 and at 4 per cent by the end of 2017-18," RBI said.
· 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. Along with initiatives announced in the
Union Budget to boost investment in infrastructure and to improve the business
environment, these factors should provide confidence to private investment and, together with the conducive outlook on inflation, deliver real income gains to consumers and lower input cost advantages to corporates," said RBI.
In January and March, RBI cut the repo rate by 25 bps each but that hasn't trickled down, barring some state-owned banks. A basis point is one-hundredth of a percentage point. A 50 bps CRR cut would free up about Rs 43,000 crore funds, adding to liquidity in the banking system.
But that’s not to say that Rajan is happy about the way the banks are keeping lending rates unchanged. At the post policy announcement press conference at the RBI HQ in Mumbai, he came down heavily on the attitude currently showcased by the banks. He said, “The notion that banks' cost of funds hasn't fallen is nonsense. When banks have to raise rates, they quote higher policy rates... Why don't they cut when policy rates go down," he added. Urging banks to cut rates, Rajan said, "The sooner rate transmission happens, better it is for the economy."
