"To get that lending they (banks) will have to be more competitive, which means they will have to cut base rate. I am hopeful it is a matter of time before banks judge that they should pass it on," Rajan said.
Raghuram Rajan-led Reserve Bank of India (RBI) has decided that the surprise interest rate cut of 25 basis points in the month of January is enough for the moment.
In the RBI's monetary policy review of February 3, 2015, the Bank has decided to maintain status quo.
The news did not go down well with India Inc who have been gunning for further snip in interest rates.
Banks, too, have been asking the governor to cut rates further.
Also Read: Macro-economic indicators favour rate cut by RBI: Bankers
The Bombay Stock Exchange's (BSE) Sensex immediately reacted to the news by shedding points. The S&P BSE Sensex fell 183 points, or 0.63%, by 1.40 pm.
Industry was hoping for a further rate cut as the inflation is firmly under control and the manufacturing index posted weak numbers. They said that a cut in key policy rates would infuse much needed capital in the industry and would boost demand and growth.
This is the similar argument the industry has been making for a long time. Therefore, rate cut in January came as a surprise and was welcomed.
However, Rajan did cut Statutory Liquidity Ratio (SLR) by 50 basis points in a bid to push banks to cut lending rates.
The Indian government demands that every bank keep a portion of its net demand and time liabilities in liquid assets like gold and cash, etc. The ratio of these assets to liabilities is called Statutory Liquidity Ratio.
By cutting SLR by 50 basis points, the RBI has effectively freed up money whcih was earlier locked-in to meet these requirements. This money can be used to lend to businesses to fulfil the need to spurt growth and fuel consumption.
He said, "Easing inflationary pressures strengthened the impact of comfortable liquidity conditions on market interest rates; sovereign and corporate bond yields declined by 50 basis points and more in Q3. However, despite a generalised fall in the cost of funds, banks have yet to pass through these effects, as also the effects of the policy rate cut on January 15, into the spectrum of lending rates."
Banks failed to pass on the interest rate cuts to their customers citing tight liquidity position.
Rajan, at a news conference, said, "To get that lending they (banks) will have to be more competitive, which means they will have to cut base rate. I am hopeful it is a matter of time before banks judge that they should pass it on."
Merely three banks, led by United Bank of India cut interest rates in line with the repo rate cut announced by the RBI on January 15.
Other important banks like HDFC Bank and State Bank of India did sound positive but in the end refrained from cutting rates.
Also Read: Raghuram Rajan rate cut: Too little, too soon
(With agencies)
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