RBI maintains status quo, nudges banks to cut lending rates

RBI today kept the key policy rate unchanged on fears of unseasonal rains impacting food prices, but nudged banks to lower lending rates while rejecting as "nonsense" their contention that cost of credit remains high.
Promising an "accommodative monetary policy", RBI Governor Raghuram Rajan however indicated rate cuts going forward depending on favourable macro economic data, and whether banks pass on the benefits of two rate cuts so far this year.
While industry expressed unhappiness over the status quo on rates, Rajan said market dynamics will force banks to lower their interest rates.
"Comfortable liquidity conditions should enable banks to transmit the recent reductions in the policy rate into their lending rates, thereby improving financing conditions for the productive sectors of the economy," he said.

The repo rate, at which the Reserve Bank of India lends to the banking system, will continue to be at 7.5 per cent and the cash reserve ratio, which is the amount of deposits parked with the central bank, will remain at 4 per cent. Bank rate has also been retained at 8.5 per cent.
"We are not looking for a specific number (on the bank rate cuts) and saying unless this happens, nothing more will happen. But we want to facilitate the process of transmission.

"I do not see an environment where credit growth is tepid, banks are sitting on money and their marginal cost of funding (has) fallen, the notion that it hasn't fallen is nonsense, it has fallen," Rajan said after unveiling the first bi-monthly monetary policy for financial year 2015-16.

RBI surprised the markets with two rate cuts of 0.25 per cent each outside the scheduled review meetings this year, but banks have yet to respond to these policy rate cut by lowering their lending rates.
After the policy announcement bankers said that most of them will have their asset liability committee meeting week to take a call on interest rates which besides repo rate depends on factors like demand for credit, cost of fund and deposit rates.
"We would see rates coming down as we see easing of interest rate cycle," SBI Chairperson Arundhati Bhattacharya said.
Commenting on the RBI's action, Chief Economic Advisor Arvind Subramanian said: "It is on the expected lines.