Plain-speaking by RBI Governor Raghuram Rajan finally galvanised banks to cut lending rates even though the Reserve Bank of India decided to hold key rates.
While SBI and HDFC Bank pared their base rate (minimum lending rate) from 10 per cent to 9.85 per cent, ICICI Bank cut it from 10 per cent to 9.75 per cent. ICICI Bank’s base rate is now the lowest in the country. Other lenders are expected to follow suit.
The base rate cuts will make loans to segments such as homes, cars, small and medium enterprises and large corporates cheaper. SBI, ICICI Bank and HDFC Bank also announced cuts in retail term deposit rates in select maturity buckets.
Since January, the RBI has been urging banks to cut lending rates. But even after the central bank cut policy rates previously, banks had not obliged.
However, on Tuesday, while explaining the rationale for holding rates, Rajan said the notion that the cost of funds for banks hasn’t fallen was “nonsense”. “Banks can borrow at the margin today at 7.50 per cent. There is plenty of liquidity in the markets. So, at some point the competitive pressure on the banks will tell,” he said.
Close watch on economy The central bank also said that it is awaiting more information on a number of recent developments, including the effects of the weather disturbances, before taking a view on cutting policy rates.
Hence, in the first bi-monthly monetary policy review, the repo rate (the interest rate at which RBI provides short-term liquidity to banks) has been left unchanged at 7.50 per cent. The Cash Reserve Ratio (the slice of deposits that banks have to park with the RBI) is steady at 4 per cent of deposits.
The RBI announced a host of other measures, including encouraging banks to peg their base rate to the marginal cost of funds rather than the average cost of funds so that lending rates are more sensitive to policy rate changes. “The bulk of this policy is focussed on measures — structural reforms — to improve the working of the financial sector, including transmission. So, the message from this review is that while we are status quo on policy, we are not status quo on all the measures needed to take the economy forward on to a higher growth path,” said Rajan.
Inflation and growth outlook The RBI projected Consumer Price Index-based inflation remaining at its current level (around 5.4 per cent) in the first quarter of 2015-16, moderating thereafter to around 4 per cent by August but firming up to reach 5.8 per cent by the year-end.
Assuming a normal monsoon, continuation of the cyclical upturn in a supportive policy environment, and no major structural change or supply shocks, GDP growth for 2015-16 has been projected at 7.8 per cent from 7.5 per cent in 2014-15, but with a downward bias to reflect the still subdued indicators of economic activity.