Rates untouched; loan ease-up hopes float
While keeping interest rates on hold, the RBI today asked banks to pass on the benefit of interest rates cut earlier to consumers and cautioned that the impact of the Pay Commission recommendations on inflation will be among the factors that the central bank will watch before finalising its monetary policy stance in coming months.
The RBI, which has cut interest rates by 125 basis points or 1.25% this year, including 50 basis points cut in the last monetary policy review in late September, left the benchmark lending rate (repo) at 6.75%.
Spelling out its policy stance, the RBI said it will use the space for further accommodation, when available, while keeping the economy anchored to the projected disinflation path that should take inflation down to 5% by March 2017.
Even though the RBI has not cut rates, consumers can look forward to lower rates from banks as the central bank is pushing them to pass on the earlier cuts. In the monetary policy review, RBI Governor Raghuram Rajan more than once pointed out the banks’ reluctance to pass on the benefits of the earlier rate cut actions to the borrowers. He said the median decrease in the base rates over the course of the year has only been 0.60% as against the RBI’s 1.25% cut in the repo rate since January. RBI also said it will this week announce methodology for determining the base rate taking into account the marginal cost of funds, a move aimed at ensuring that banks pass on policy rate cuts to borrowers. Base rate is the minimum benchmark lending rate below which a bank cannot lend.
Banks have indicated that lending rates could moderate. Responding to the move, Arundhati Bhattacharya, chairman, SBI, said the guidelines on the base rate calculation based on marginal cost of funds will be watched and appropriate actions will be taken on the same.
Chanda Kochhar, MD and CEO, ICICI Bank, said as the impact of monetary policy measures taken so far play out in terms of bank funding costs, lending rates are expected to continue to moderate.
The RBI Governor said second-quarter GDP growth indicates early signs of recovery but the RBI will stick to its earlier projection of 7.4% economic growth for the current fiscal with a marginal downward bias.
Pointing to the inflation risks, Rajan said, “Uptick of CPI inflation excluding food and fuel for two months in succession warrants vigilance,” promising to ease rates as and when room is available. “We are in accommodative stance,” he said.
The implementation of the Pay Commission proposals, and its effect on wages and rents, will also be a factor in the Reserve Bank’s future deliberations, though the central bank said its direct effect on aggregate demand is likely to be offset by appropriate budgetary tightening as the government stays on the fiscal consolidation path.
According to Crisil Research, the central bank cautioned vigil on core inflationary pressures, which could see some uptick as consumer demand and inflationary expectations perk up due to Seventh Central Pay Commission payouts next fiscal.