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Cannot do big rate cut since banks may not pass it on: Rajan

business Updated: Apr 06, 2016 23:54 IST
Raghuram Rajan
RBI governor Raghuram Rajan interacts with journalists after the first monetary policy announcement of the current fiscal year in Mumbai.(AP)

Conditions are in place for the Indian economy to start growing faster in the next few quarters as banks pass on its rate cuts to their borrowers, Reserve Bank of India governor Raghuram Rajan told Bloomberg TV in an interview on Wednesday.

Rajan also said it would have been a “mistake” to do a big rate cut as the central bank is not sure whether aggressive cuts really work if banks don’t reduce lending rates.

The RBI cut the repo rate — the rate at which it lends to banks — by 0.25 percentage points to a five-year low of 6.50% on Tuesday.

Still, Rajan left open the prospect for more easing should inflation conditions allow it, though he added that inflation in services, education and healthcare had not yet eased “dramatically.”

A softening in Indian inflation to closer to global trends of lower inflation would add room for potential rate cuts, he added.

Reacting to analysts’ expectations of a 0.50 percentage point cut in the repo rate, Rajan said the RBI used up whatever room it had.

“We are not holding back any rate cuts. The room (for rate cut) was limited given the global uncertainty... “I am firmly of the view that we are not in a stable world.”

“All conditions are now in place for banks to cut rates,” he added.

Meanwhile, cautioning against jumping to conclusions with regard to the Panama Papers, RBI deputy governor SS Mundra said the central bank will have to look into the evidence to find out what is legitimate or not. “It would be too hasty to jump to a conclusion that everything is illegitimate or everything is legitimate. We will look into the evidence along with the team. Then it would be fair to reach a conclusion.”