Rajan retains key rates, asks banks to pass on cuts

Promising to remain “accommodative” as long as inflation remains under control, RBI on Tuesday kept its policy rate unchanged even as Governor Raghuram Rajan nudged banks to pass on the benefits of earlier cuts to borrowers.

Rajan said there is more room for rate cut by banks as the lenders on an average have only passed less than half of the 1.25 per cent reduction announced so far during 2015.

Announcing his fifth bi-monthly monetary policy review of this fiscal, the RBI Governor also said the economy is “truly in a recovery mode” as he left the the repo and the CRR unchanged at 6.75 and 4 per cent, respectively.

While the government termed the review as “balanced”, experts said that any further movement of rates by RBI would depend on the much-awaited decision by the US Federal Reserve on December 16, where it is widely expected to begin a rate-hike cycle. Besides, the RBI would keenly watch the domestic data on inflation, which has seen an uptick recently.

Stating that inflation is expected to accelerate till December before plateauing, Rajan said it may follow RBI’s projected path “with risks slightly to the downside”.

The Reserve Bank, he said, “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 per cent by March 2017”.

Bankers on their part hinted at lower borrowing costs going forward, as they sensed Rajan’s resolve to make them calculate base rates on the basis of marginal cost of funding.

ICICI Bank chief Chanda Kochhar said, “As impact of monetary policy steps taken so far play out in terms of bank funding costs,lending rates are expected to continue to fall.” 

SBI Chief Arundhati Bhattacharya was non-committal. In a statement, she said, “Today’s policy undertone has leaned towards the neutral-to-dovish side. The Governor’s indication of being accommodative policy sends a positive signal for the economy.”

On the banks facing huge bad debts, Rajan said steps taken by the central bank and the government should help lenders clean up their balance sheets by March 2017.

The RBI Governor said banks have been given more powers and flexibility to deal with bad loans, which have crossed 6 per cent as of the June quarter.

The gross NPA of the public sector banks rose to 6.03 per cent as of June 2015 from 5.20 per cent in March 2015.

The RBI Governor said the second quarter GDP growth indicates early signs of recovery but the central bank will stick to its earlier projection of 7.4 per cent economic growth for the current fiscal with a marginal downward bias.

Rajan also expressed anguish at the banks’ reluctance to pass on the benefits of the earlier rate cut actions to the borrowers.