Rajan maintains status quo, wants banks to cut rates

Mumbai, Aug 4

Disappointing industry and the Government alike, Reserve Bank of India has kept the key policy rate unchanged 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 has decided to keep the benchmark lending (repo) rate unchanged at 7.25 per cent as also the cash reserve ratio (CRR) at 4 per cent.

Unveiling the third bi-monthly policy of this fiscal on Tuesday, Reserve Bank 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, justifying RBI’s decision.

He further said: "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 per cent.

The central bank has disregarded Union Finance Ministry’s advice favouring a rate cut.

India Inc has described the RBI's status quo stance as a "missed opportunity".

While RBI reduced the benchmark policy rate by a total of 75 basis points or 0.75 per cent since January, banks have passed on only 0.3 per cent 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 re-look 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 said: "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: “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.

FICCI President Jyotsna Suri said: "The decision of central bank to keep the policy rate unchanged is disappointing for the industry. Given that the industrial growth still remains volatile and demand conditions have not seen much improvement, there is a need to give policy stimuli to encourage demand and investments”.

According to CII Director General Chandrajit Banerjee, RBI should have continued the policy of front-loading interest rate cuts to give a strong signal that the central bank is aggressively addressing the growth risks in the economy accruing from weak demand conditions.

"RBI's decision to maintain the status quo on policy rates indicates a guarded approach towards monetary easing to restrain inflationary expectations," he added. PTI