The Reserve Bank of India (RBI) on Tuesday kept its lending rate—the repo rate—unchanged at 7.25%, ignoring a chorus of calls from government officials and business leaders for cheaper loans to aid investment and household spending.
A status quo on interest rates would mean households may have to wait longer for lower loan rates to buy houses and goods such as cars, which peak during the festival shopping season in October and November.
RBI governor Raghuram Rajan also said that the government and the central bank have reached a broad understanding on the formation of the “monetary policy committee” to decide on interest rates.
“The MPC details will be made public when the government is more comfortable,” Rajan said after announcing the monetary policy review.
A recent report has suggested the removal of the RBI governor’s veto power under the new monetary policy committee.
The new report has proposed a seven-member committee, including four members picked by the government, to vote on interest rate decisions.
This has kicked up a storm with many experts arguing that a government-elected panel will undermine the RBI’s independence and severely dent the central bank’s independence.
Rajan also said the RBI was expects to issue the first set of “payment banks” licences by the end of this month.
Rajan, however, kept the door open for reducing borrowing costs in the coming months if prices did not gallop past the central bank’s tolerable threshold of 6%. India’s retail inflation rate rose to an eight month high of 5.40% in June driven by higher food prices, although a cheaper fuel will likely help contain rise in prices.
In June, the RBI cut its main lending rate--the repo rate --by 0.25 percentage points to 7.25%, but corporate and individual borrowers were hoping for a repeat action, which Rajan did not oblige on Tuesday.
Rajan also did some plain-speaking saying banks have not passed on previous rates cuts fully to consumers.
“Since the first rate cut in January, the median base lending rates of banks has fallen by around 30 basis points, a fraction of the 75 basis points (0.75 percentage point) in rate cut so far. As loan demand picks up in Q3 of 2015-16 (October-December), banks will see more gains from cutting rates to secure new lending, and more transmission will take place,” he said.
The government and the RBI’s new monetary policy framework agreement signed in February have set a new retail inflation target of below 6% by January 2016 and 4% by March 2017.
Rajan, however, kept two key main rules unchanged disappointing markets, which were expecting the central bank to cut the statutory liquidity ratio (SLR) and the cash reserve ratio (CRR) that would have given banks more funds to lend and enable them to lower loan rates.
The 30-share benchmark BSE Sensex fell by about 70 points on Tuesday to 28119 points as RBI took a cautious stance on the economic recovery, flagged concerns over erratic monsoon rains, and refused to unlock funds for banks by slashing the SLR and CRR.
SLR, the proportion of deposits banks are required to park in government bonds, stands at 21.5%, while the CRR, the proportion of deposits that banks have to park with the RBI, stands at 4%.
Rajan said that “economic recovery is still work in progress.” The central bank’s survey-based indicators point to flat capacity utilisation and new orders, with corporate sales growth declining.
Although overall business confidence is positive, the level of optimism was a shade lower in April-June than in the preceding quarter. Investment, as measured by new projects, is still weak, primarily because of still-low capacity utilization, the RBI said in the monetary policy review.
“However, there are signs that consumption demand, especially in urban areas, is picking up. Car sales for July were strong,” it said.