India's central bank now awaits commercial lenders to cut rates

| Tuesday, August 4, 2015 - 13:20
First Published |

India's central bank commercial lenders cut

Mumbai: Ignoring the clamour for an easing of monetary policy, India's central bank kept its key lending rates unchanged on Tuesday, sticking to its stand that further cut can only be effected if commercial lenders pass on the previous reductions to borrowers.

Having cut its short-term lending rates thrice thus far in this calendar year, to bring it down to 7.25 percent, Reserve Bank of India (RBI) Governor Raghuram Rajan said a host of factors led to a status quo on Tuesday's monetary policy update.

"Since the first rate cut in January, the median base lending rates of banks has fallen by around 30 basis points, a fraction of the 75 basis points in rate cut so far," Rajan said in the central bank's monetary policy update at the Mint Street headquarters here.

"As loan demand picks up in Q3 of 2015-16, banks will see more gains from cutting rates to secure new lending, and more transmission will take place," he said, adding liquidity will not be a cause for worry since the government has decided to infuse more capital into state-run banks.

He, however, expressed some areas of concern, while also some cheering factors.

"Turning to the balance of inflation risk, most worrisome is the sustained hardening of inflation excluding food and fuel. Moreover, the full effects of the service tax increases that took effect from June, will feed through over the rest of the year," he said.

"The outlook for growth is improving gradually. Favourable real income effects could accrue from weaker commodity prices, in particular crude oil, and a possible step-up in agricultural activity if monsoon conditions continue to improve," he added.

"Taking into account all this and 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."

As a result of the policy update on Tuesday, the repurchase rate, or the short-term lending rate of the central bank, remains unchanged at 7.25 percent and so does the cash reserve ratio (CRR), or the liquid money banks have to compulsorily hold, at 4.00 percent.

Accordingly, the reverse repo rate, or the central bank's short-term borrowing rate, remains at 6.25 percent.

The markets did not appear to have taken the policy update negatively.

Ahead of the announcements, the sensitive index (Sensex) of the Bombay Stock Exchange had fallen to 27,963.71 points, after opening somewhat higher at 28,225.04 points, against the previous close at 28,187.06 points.

But soon after, at around 11.30 a.m., the index rose to around 28,200 points -- mainly on account of Rajan's announcement at a post-update press conference that the bank will soon launch rupee-denominated bonds.

Experts feel this could add around $5-6 billion to India's foreign exchange reserves.

During the assessment, Rajan also did not think much of investment-led growth, while maintaining the country's gross domestic product (GDP) growth at 7.6 percent for the current fiscal, and an inflation target of around 6 percent in January next year.

"Notwithstanding some improvement in the state of stalled projects, supply constraints continue to be binding and new investment demand from the private sector and central government remains subdued," the central bank governor said.

As far as price rise and average citizens are concerned, he said: "Some food prices, particularly of protein-rich items, pulses and oilseeds have risen sharply in recent months. They will have to be carefully monitored as they tend to be sticky and impart an upward bias to inflation."

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