RBI nudges banks to pass on lower rate to consumers

RBI on Tuesday nudged banks to take a cue from cut in small saving schemes and pass on benefit of benefit of declining interest rates to consumers.

The Reserve Bank reduced the short term lending rate (repo rate) by 0.25 per cent to 6-year low of 6.25 per cent in the fourth bi-monthly monetary policy statement.

It also said that easy liquidity conditions engendered by it’s operations should enable the smooth transmission of the policy action through various market segments.

“Furthermore, banks should find added impetus for better transmission by the recent downward adjustment in small savings rates,” said the resolution by the 6-member Monetary Policy Committee headed by RBI Governor Urjit Patel.

RBI has reduced key interest rate (repo rate) by 175 basis points since January 2015. 

However, the banks have been reluctant to pass on the entire benefits to consumers.

The government had last week reduced the interest rates on small savings schemes by 0.1 per cent for the October- December quarter of the 2016-17 fiscal. 

The schemes include, Public Provident Fund, Kisan Vikas Patra, and Sukanya Samriddhi Account.

The September round of the professional forecasters survey also indicates a greater degree of anchoring of their inflation expectations, relative to other agents, around the RBI’s inflation targets.

They expect inflation to ease to 4.7 per cent in Q4 of this fiscal year and to 4.4 per cent by Q2 of 2017-18.

RBI said these projections incorporate the 7th pay commission award relating to salaries and pensions which will work through aggregate demand and expectations effects to add around 10 bps to the baseline path from Q4 of 2016-17. 

Furthermore, the projections also factor in cost-push effects of the proposed increase in minimum wages which would add 5 bps to baseline inflation within two months of implementation.

On the impact of GST on inflation, the report notes that based on the current reckoning, the pass-through of the goods and services tax will likely commence from April 2017 and last for about 12-18 months, going by the cross-country experience.