As had been widely expected, the Reserve Bank of India left key interest rates unchanged on Tuesday, but said it would remain “accommodative” to inflation changes and global developments. “Hopefully, as we go forward, some of the areas of weakness will turn around”, Rajan said after the 5th bi-monthly monetary policy review in the 2015-16 fiscal. First, CPI inflation is set to achieve the RBI’s under-6 per cent January 2016 mandate. “The uptick of…inflation…for two months in succession warrants vigilance”. The norms are expected to come by next week and will force banks to revise their lending rates.
Advertisement
The RBI governor noted that only a fraction of the interest-rate cuts percolated through to the economic system: the median base lending rate has declined by only 0.6 percentage point, less than half of the cumulative 1.25 percentage points the RBI has shaved off rates since January. The Consumer Price Index or retail inflation accelerated to 5 per cent in October led by a surge in food items such as pulses, matching RBI’s target for March 2017.
Bank of India managing director and chief executive officer Melwyn Rego said: “The new guidelines on base rate calculations are expected soon and banks will realign the rates to new methodology”.
In a bid to force banks to transmit policy rates faster, the RBI had sometime back proposed that banks move to the marginal cost of funds method to calculate their base rates to which all lending rates are benchmarked.
The RBI’s decision is scheduled for 11 a.m. The monetary authority has cut the repo rate by 125 basis points this year, including a larger-than-estimated 50-basis point reduction on September 29.
“The focus has now shifted to the transmission of lower policy rates to banks’ lending rates”.
“We hope that over the span of next year, say by March 2017, a full clean-up will have been done by banks”, said RBI governor Raghuram Rajan in the post policy press conference.
India Inc too today asked bankers to fully pass on the previous rate cuts as RBI has left the policy rates unchanged. On Tuesday, the RBI maintained a status-quo by not lowering the policy rate, but it has sent a strong message to banks to lower rates. “This is important for revving up overall demand in the economy, which is still far from being robust”, Ficci Secretary General A Didar Singh said.
Advertisement
The weak credit offtake has led to muted growth in these PSU banks’ net interest income (4-7 per cent) in the past few quarters.
