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RBI Governor Urjit Patel told the Monetary Policy Committee (MPC) that there is room for banks to further cut interest rate while sounding a note of caution on inflation front in the coming months. The six-member MPC, headed by Patel, had opted for status quo on the benchmark policy rate (repo rate) on April 6. "There is still room for banks to cut lending rates. For efficient transmission, it is important that interest rates on small savings are not out of line with interest rates on other comparable instruments in the financial system," Patel said as per the MPC minutes released by the RBI today. The weighted average lending rate of banks has come down only by 0.85-90 per cent as against a 1.75 per cent cut in policy rates since January 2015. Lower lending rates encourage economic activities, but they also have the potential to fuel inflationary expectations.
The RBI's mandate is to contain inflation without hurting economic growth. Referring to the price situation, Patel said that notwithstanding likely favourable base-effects in the next few months, "the outlook for inflation calls for close vigilance". The vigilance, he said, was required with a view to ensuring that inflation remains closer to the target of 4 per cent. Another member and RBI Deputy Governor Viral Acharya said that on the growth front, the remonetisation is continuing apace and many sectors of the economy are recovering steadily after the transient slowdown. "There are signs though that the recovery is somewhat uneven. Private investment, given the high indebtedness of several stressed sectors, remains a particularly weak spot," he said. RBI Executive Director and MPC member Michael Debabrata Patrar said high frequency indicators may be indicating that demonetisation affected actual output rather than potential. "With remonetisation, therefore, the output gap may close sooner than expected - perhaps at a sub-optimal level since there is slack in several industries - and demand pressures could soon confront the path of inflation in the months ahead," he said. In a surprise move, the government on November 9, 2016 had demonetised old Rs 500/1000 notes with an aim to check black money, fake currency and terror financing.