Talking about the global conditions, it said that global financial markets have recouped the losses suffered in the turbulence at the beginning of the year.
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“The new proposals were done primarily to aid in the transmission of monetary policy and ensure that the quantum of liquidity in the banking system was more compatible with the RBI’s accommodative stance”, cited Barua. “The RBI decision to cut repo rates by 25 basis points was as per market expectations, even as the liquidity management measures were a pleasant gift to the market”. Banks are now literally ring-fenced and have to cut lending rates. Non-performing loans (NPLs), or bad loans, spiked by almost a third to $60.3 billion late a year ago, according to Reuters.
The Reserve Bank of India sold treasury bills at their lowest yields in more than five years at a weekly auction on Wednesday after its pledge to infuse cash into the banking system sparked a rally in short-term rates.
The Reserve Bank of India cut its policy interest rate by a quarter point to 6.5% on Tuesday and took other steps to increase liquidity in the financial system.
While bankers did not say anything specific about the transmission on Tuesday, analysts believe rate cuts are on the anvil. Now, it is the turn of banks to lower their lending rates, armed as they are with more room to lower deposit rates and a new way to set their lending rate, based on the marginal cost of funds. This cut will help in giving the desired push for the economy.
The RBI’s focus is now shifting from rate reduction to liquidity measures. It is important to understand the RBI was able to ease the lending rate, because of what the government did earlier.
Jayarama Bhat, MD & CEO, Karnataka Bank: With the key conditions such as decline in inflation and the government sticking to its fiscal consolidation targets being supportive, the continuance of the accommodative stance by Reserve Bank was very much expected.
He ruled out the notion that RBI has not been conservative in the policy and said the policy aggression was not on rate cuts but on rate transmission by banks.
RBI Deputy Governor R Gandhi said the exposure guidelines primarily will be based on the lendable capital of the bank, adding, “A draft circular on the large exposures framework will be issued for public comments in June and will be implemented by January 1, 2019”.
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“Eventually, lower interest rates would have an all-round positive impact in terms of reducing the non-performing assets, increased investment, aggregate domestic demand and overall vibrancy in the system”, said Mr Kanoria. The RBI reduced this to 90% from 16 April 2016 to give banks more flexibility in managing their funds. RBI governor Raghuram Rajan showed the seriousness of his intention to see that the rate cuts are transmitted to corporates, and to those who take home, auto and personal loans, etc., by focusing the first bi-monthly policy statement of 2016-17 on creating liquidity “to strengthen activity and aid government initiatives in reviving economic activity”.
