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RBI guv Rajan maintains status quo, wants banks to cut rates

The Reserve Bank of India (RBI) kept its key policy rate unchanged on Tuesday, citing inflationary concerns even as it expected banks to pass on the benefit of the previous rate cuts to borrowers.

business Updated: Aug 04, 2015 18:50 IST
RBI,Raguram Rajan,RBI rate cut

The Reserve Bank of India (RBI) kept its key policy rate unchanged on Tuesday, citing inflationary concerns even as it expected banks to pass on the benefit of the previous rate cuts to borrowers.

After three cuts in seven months, the RBI decided to keep the benchmark lending (repo) rate unchanged at 7.25% as also the cash reserve ratio (CRR) at 4%.

Unveiling the third bi-monthly policy of this fiscal, RBI governor Raghuram Rajan indicated that he could go for another rate cut ahead on the next policy on September 29 depending on the macro-economic data and how monsoon pans out.

"Given that policy action was front-loaded in June, it is prudent to keep the policy rate unchanged at the current juncture while maintaining the accommodative stance of monetary policy," Rajan said while justifying the status quo policy stance.

Read: RBI keeps policy rates on hold at 7.25%

He further said that "the economic recovery is still work in progress... The outlook for growth is improving gradually."

He retained the growth projection for the current fiscal at 7.6%.

India Inc, however, described the RBI's status quo stance as a "missed opportunity". The finance ministry too has reasons to be unhappy, as the central bank has not heeded to its advice favouring a cut and that the RBI should not be solely guided by inflation.

As regards the impact of the policy on borrowers -- individuals and corporates-- observers feel much would depend on how the banks react to Rajan's advice to them for transmitting the earlier cuts.

While RBI reduced the benchmark policy rate by a total of 75 basis points or 0.75% since January, banks have passed on only 0.3% to borrowers, Rajan said.

Although bankers did not give any firm commitment of a rate cut in the immediate future, they did promise to look into such a possibility.

In her comments on the RBI policy, ICICI Bank managing director and CEO Chanda Kochhar said: "I expect to see easing of rates over a period of time as further transmission of accommodative monetary policy takes place. Inflation is within the targeted range and should this trend sustain, we could see further policy rate action as well."

Expressing similar opinion, State Bank of India (SBI) managing director (corporate banking) P Pradeep Kumar said: "We are continuously looking at our cost of deposits. Whenever it shows a downward trajectory, we will have a relook at it. I don't think I will be able to give a commitment whether it is before September 29."

Bank of Baroda (BoB) Executive Director KV Ramamoorthy opined, "we are definitely bound to pass it (rate cut) on. We are very important market player and any cut in our base rate will only make us more competitive in fact, when the real demand goes up."

During his customary press conference, Rajan sought to defuse the controversy over the issue of curtailing the veto power of RBI governor to set interest rates saying it would be better for the monetary policy committee (MPC) to decide benchmark rates rather than one individual.

He added that while the details of the monetary policy committee would have to be ironed out, "there are no differences between the RBI and government" in this matter.

The revised draft of Indian Financial Code (IFC), as released by finance ministry last month, had suggested doing away with this veto power and wants the seven-member MPC to take decisions by a majority vote.

Of the seven members of the MPC, four would be government nominees and rest from the RBI.

Read:RBI may cut rates before next policy review: Raghuram Rajan

State Bank of India rules out rate cut in near future

First Published: Aug 04, 2015 18:40 IST