RBI says more room for banks to cut rates

Indian banks have more room to lower their lending rates after aggressive rate cuts by the RBI.

Indian banks have more room to lower their lending rates after aggressive rate cuts by the Reserve Bank since last October,Reserve Bank of India Governor Duvvuri Subbarao said on Wednesday.

“Having said that in defence of the banks,I also want to say given the current economic context,and the given the policy initiatives taken by the RBI,there is considerable scope for banks to reduce their lending rates,” Subbarao said at an industry conference.

Since October,the RBI has cut the repo rate at which it lends to banks by 425 basis points and has called on banks to pass on the cuts to help boost economic activity.

In its annual monetary review last month,the central bank lowered the repo rate by 25 basis points to 4.75 per cent,and the reverse repo rate at which it absorbs excess cash from banks by an identical proportion to 3.25 per cent.

Subbarao said the central bank’s effective rate was now the reverse repo rate,though it had been the repo rate till last October.

He said that although the transmission of monetary policy to the banking system had weakened because of the impact of the global financial crisis,it had not broken down and in fact lending rates of banks had fallen significantly.

“Its not correct to say that the transmission has broken down… Of course,it’s weaker than it was before because of the impact of the crisis,” he said,adding that such aversion to lending from banks is expected in an economic downturn.

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Subbarao said that inflation is always a concern,and though headline inflation had eased,consumer price inflation (CPI) was still high.

“Negative inflation over the next few months,but the central bank would not read that as deflation because India is not suffering from a demand contraction,” he said.

“We are sensitive to inflation,the implications on inflation of the expansionary measures that we take. Also,we must note that the CPI is still high,” he added.

India’s wholesale price index rose 0.7 per cent in the 12 months to April 25,above the previous week’s annual rise of 0.57 per cent. But annual consumer price inflation stood at 9.63 per cent in February,as food prices remained firm.