RBI governor Raghuram Rajan holds out hope for rate cut in early 2015 | business | Hindustan Times
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RBI governor Raghuram Rajan holds out hope for rate cut in early 2015

business Updated: Dec 03, 2014 02:24 IST
HT Correspondent

The Reserve Bank of India (RBI) governor Raghuram Rajan kept benchmark interest rates unchanged on Tuesday, but said that banks haven’t cut lending costs despite a fall in money market rates.

The RBI governor said the transmission of the monetary policy has not taken completely as banks have not passed on the benefit of lower interest rates to borrowers.

In the recent times, it has been observed that the inter-bank call rates have fallen well below the RBI-desired level of 8%, the prevailing repo rate (the rate at which the central bank lends money to commercial banks). Sharp dips in call rates signal liquidity available in the market.

The call money market deals with day-to-day funds requirements of the banks. When one bank faces a temporary shortage of cash, it borrows from another bank that has surplus cash for a period of one or two days.

“The transmission process is still not working significantly and therefore one would imagine that if past falls in short-term rates haven’t been passed through, then additional rate cut is only a mild chance,” Rajan said.

“I do believe that there is a signalling effect and I do believe that once banks are confident that rates will come down and stay down, they may start passing through more,” Rajan said.

Rajan, however, maintained that he is not suggesting anything to banks asking them to lower their lending rates.

Analysts and bankers expect the RBI to cut interest rates in March next year.

“The policy stance is obviously dovish. He (Rajan) has left the window open, which means that a rate cut could happen at any point of time,” said SBI chairperson Arundhati Bhattacharya.

“To that extent, the market is already expecting a cut early next year. Our feel is that it will probably be after the budget and the cut may be more than 0.25 percentage points at that point of time,” she added.

Other experts also echoed similar opinion.

“The first rate cut could take place post-budget in 2015. By that time, there would be more clarity on the inflation trajectory as well as the fiscal health of the economy,” said DK Joshi, chief economist of Crisil, a credit rating and research firm.

ICICI Bank managing director Chanda Kochhar said that “results of the government actions to energise investment activity should start playing out in the coming months. As this happens and interest rates moderate, we should see an improvement in growth going forward”.

“We expect RBI to reverse its policy stance by lowering the repo rate in the next policy in February 2015 and start reducing the repo rate by 0.25 percentage points to begin with,” said Madan Sabnavis, chief economist, Care Ratings.