The Reserve Bank of India Governor, Raghuram Rajan, stood pat on interest rates, preferring to wait for fresh triggers, especially the Union Budget to take a decision on further easing.

The repo rate (the rate at which the RBI lends short-term to banks) was left unchanged at 7.75 per cent in the sixth bi-monthly monetary policy on Tuesday. However, to encourage banks to lend more, the central bank announced a 50-basis points cut in the statutory liquidity ratio — the investment they necessarily have to make in government securities — to 21.5 per cent from 22 per cent.

More liquidity The cut in the SLR is expected to make banks liquid to the tune of about ₹45,000 crore. The RBI said banks should use this headroom to increase their lending to productive sectors on competitive terms to support investment and growth. Justifying its stand, the RBI said that “given that there have been no substantial new developments on the dis-inflationary process or on the fiscal outlook since January 15, it is appropriate for the Reserve Bank to await them and maintain the current interest rate stance.”

The repo rate was cut barely 20 days ago, outside the policy review cycle (on January 15), from 8 per cent to 7.75 per cent. Since then, only two banks – Union Bank of India and United Bank of India — have cut their base rate or the minimum lending rate. In this calendar year, market players are expecting the repo rate to be cut by another 50-75 basis points to support growth.

Crisil Market said the recent rate cut is unlikely to trigger a sharp increase in credit growth as money market rates are already 100-150 basis points lower than bank lending rates.

However, Rajan, who turned 52 on Tuesday, said he is hopeful that banks will pass on the rate cut. “Many have been relatively quicker to cut their deposit rates but not so quick to cut lending rates. Eventually, competition or the ‘ spardha ’ is what matters,” he said. State Bank of India Chairperson Arundhati Bhattacharya said the RBI’s policy was in line with market expectations. “With inflationary expectations at a 21-quarter low and coupled with a benign global environment, we are in the early phases of a prolonged rate easing cycle.”

Other measures The central bank also announced a slew of other measures, including a proposal for providing greater flexibility in the pricing of instruments to meet the emerging needs of foreign direct investment. The RBI rejected banks’ plea to extend the deadline (of April 1, 2015) for withdrawing the special asset classification benefit for all restructured loan accounts by a year. This could lead to lowering of the asset classification of these accounts, requiring banks to make provisioning.

Soon, non-callable deposits with higher returns

Depositors will soon be able to get better interest rates but only if they agree to give up their discretion to withdraw the money.

The Reserve Bank of India proposes to allow banks to take “non-callable deposits” which will not allow the customer to withdraw the money till the end of the tenure.

Banks may pay higher interest rates on non-callable deposits to compensate the depositor for sacrificing the discretion to withdraw his money when he wants.

Individuals and companies with surplus liquidity, which may not be required for a certain period of time, can lock into such deposits.

The RBI will soon issue details relating to tenure and interest rates.

The move is aimed at overcoming the asset-liability mismatches for banks.

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