Lack of capital prevents banks from transferring rate cuts: RBI staff study

Markets do not view banks with low capital favourably and offer funds at a higher rate, says study done independently.

Banks are unwilling to pass on policy rate cuts by the Reserve Bank of India (RBI) because they lack capital, a working paper by the staff of the central bank has said. The government, therefore, should infuse more capital in state-owned banks for healthy credit growth at a cheaper rate.

The study is not necessarily the view of the central bank and the research done for it is independent.

There have been many theories on why banks in India don’t pass on policy rate cuts: the need to keep a minimum rate to protect depositors’ interest, the rigidity of small