Can't ask banks to cut rates, competition will force them: RBI chief Rajan

With most banks yet to pass on the benefit of lower interest rates to consumers following the rate cut last month, RBI Governor Raghuram Rajan today said the central bank cannot ask them to lower the rates, but eventually competition will force them to do so.

"I think it is the pressure of the competition which will eventually force banks to pass through these rate cuts. So let us wait and see. It is not regulatory intervention...It's competition (that will force lenders to lower rates)," Rajan told reporters at the customary post-policy press briefing.

To a question on why the RBI is not nudging banks to lower rates, Rajan said, "The Reserve Bank is not the owner and is not in any way involved in the day-to-day running of banks. Rate cut is the decision which the management of banks have to take. So, we cannot nudge them to cut lending rates."

Also Read: RBI Monetary policy: By lowering SLR, Rajan makes case for banks to cut lending rates

Despite a fall in long-term interest rates, treasury rates and corporate bond rates, banks' lending rates have remained flat, he said.

After the January 15 rate cut, where RBI lowered the repo rate by 25 basis points to 7.75 per cent, only two state-run banks -- Union Bank and United Bank -- cut the rates.

"Despite a generalised fall in the cost of funds, banks are yet to pass through these effects, as also the effects of the policy rate cut on January 15, into the spectrum of lending rates," Rajan said.

"Of course, when you talk to banks they are very happy that we cut the rates. At some point my guess is that transmission has to take place," Rajan said.

He said given the weak credit demand and as the overall financing has been quite strong because large corporates are going outside the banks, banks at some point in time will have to start lending again. 

"To get that lending, banks will have to be more competitive which means they will have to reduce their base rates," the RBI Governor said.

With the revised norms on calculation of the base rate, Rajan said banks will soon take a decision to pass on the benefit of lower rates to customers.

"Many have been relatively quick to cut the deposit rates but not so quick to cut the lending rates. I presume some are hoping they can get the spread for a little more time to repair balance sheet."

Asked whether it is the right time for banks to reduce their lending rates, he said the decision on timing has to be taken by the banks.

He said the monetary policy transmission takes time because even though interest rates change, the change in interest rate feeds into investment over time.

"So it is not the first leg of transmission I have been talking about but it is the second leg once it is gone into interest rates. We are still waiting for first leg to take place, that is, it has to go into bank lending rates," he said, adding transmission normally takes three quarters to reflect in the real economy.

He said transmission has already taken place in call money rates where the rates have fallen. "Therefore, I think we will see that transmission operate already because it is reducing the cost to large corporation to borrow from the market and banks will have to match that at some point."

Rajan said monetary policy is a long-drawn process where RBI actions take up to three quarters to have an impact on the ground.

"When we cut the interest rates it makes news for you, but it doesn't do anything for the economy for three quarters. We need to take into account the whole view, knowing that we are steering a ship which moves fairly slowly," Rajan said.