Letters: Correct analysis

The editorial, "An opportunity lost" (August 5), criticises the Reserve Bank of India's (RBI) stance on the third monetary policy. The low inflation rate of the past nine to 10 months is mainly due to lower import inflation rate on account of subdued crude and commodity prices, not domestic mitigating factors. A change in repo rate could have brought down the base rate of banks had it induced reduction in deposit rates, but that is not happening.

After Raghuram Rajan took over as RBI Governor, the central bank raised the repo rate by 75 basis points in FY 2014, while banks increased their base rate by 25-30 basis points. We are now seeing a reverse pattern: Since January 2015, the repo rate has gone down, followed by banks cutting their base rates.

Base rate of banks mainly depend on the cost of longer-tenure funds (deposit), whereas repo rate is an overnight rate and its transmission is full at the shorter end of the yield curve. The RBI has indicated in the past that the ideal difference between repo rate and inflation is 1.5-2.0 per cent - which the central bank has maintained so far - and not 1-1.5 per cent as mentioned in the editiorial.

R K Juyal Mumbai

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