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The Reserve Bank of India (RBI) has raised concerns over lack of monetary transmission in the banking system despite a fall in short-term rates. Banks have already begun to reduce the deposit rates but they are yet to cut the lending rates. "The transmission process is still not working as significantly; therefore, one would imagine a fall in short-term rates has not been passed through and an additional rate cut will have only a mild chance," said RBI Governor Raghuram Rajan in a post-policy conference call on Tuesday.
Currently, the base rate - the minimum rate at which most banks lend to their customers - is 10 per cent or more. "I would believe banks might start passing through more when they are confident rates would come down and stay down. For us, reaching that point would signal very strongly about interest rates. Today is premature but I have laid out the condition where we think we will be in a position to move," said Rajan.
High interest rates prevailing in the banking system is considered by many as a key factor responsible for slow credit offtake.
On the other hand, slow economic growth has impacted credit demand from companies, due to which banks are focusing on retail credit. "I think it will be beyond our ambit to guide banks into specific areas. That said, Mr Mundra (RBI deputy governor S S Mundra) and I have expressed some caution to banks on jumping into retail at this point... there has been a fair amount of credit going to retail; it should not be seen as new panacea," said Rajan.
This was a fifth straight bi-monthly monetary policy review that saw Rajan leaving the repo rate unchanged. The rate was last increased in the January monetary policy review last year, by 25 basis points to eight per cent. Rajan defended the status quo by saying he did not want to a "flip-flop" on the policy stance and was looking for "certainty" on various factors, mainly inflation, before lowering the repo rate.
RBI is in the process of having discussions with the government about the new monetary policy framework. "Our expectations from the progress of those discussions is that the government is comfortable with the 4 +/-2 per cent target. That is what will constitute inflation objective as we go forward. The precise timeframe by which the objective has to be achieved, the path, etc, will have to be spelt out as we discuss further. What you should keep in mind is that we will gradually move into this structure after January 2016," said Rajan.
The governor, who is aiming to contain retail inflation at six per cent by January 2016, said disinflation process was underway and factors like a fall in global crude oil prices were positive for the country, which imports over 80 per cent of its fuel requirements.
RBI Deputy Governor Urjit Patel, under whose chairmanship a committee had earlier this year suggested adoption of inflation targeting under a new monetary policy framework like some other countries, said the medium-term inflation target would help guide the central bank to a stable regime and help bring down the risk premium that gets attached.
On support from the government and the fiscal deficit number, Rajan said the government had assured it was sticking to the target of containing the deficit at 4.1 per cent, in spite of troubling factors, such as uncertainties on growth, that were limiting revenues.
RBI has observed that some investment by Foreign Portfolio Investors (FPIs) is taking place through the mutual fund route. "Some investments have happened through mutual funds in government securities, commercial papers, certificates of deposit and treasury bills. As we have put some restrictions on FPI investments, they are indirectly investing in those. But the limit that has been utilised by FPIs for the short-term papers through the mutual fund route is not very significant as of now," said RBI Deputy Governor H R Khan in the post-policy conference call.
