Banks not passing on rate cuts to borrowers: RBI

07 April 2009

Reserve Bank of India governor D Subbarao has expressed concern that banks have not cut their lending rates to the extent they should have in response to the softening of central bank's key policy rates, even as (wholesale) inflation hovers near zero per cent.

"The response of the banking system (to the policy actions) has been positive...but banks are yet to respond as much as warranted by the policy," Subbarao said at a seminar organised by the Federation of Indian Chambers of Commerce and Industry in New Delhi.

Suubarao said that the transmission of monetary policy is weak, on account of which policy rate signals do not get effectively communicated to the market participants. He has promised to look into ways of improving this.

The 'policy actions' refer essentially to the repo rate, or the rate at which RBI lends funds to banks, and the reverse repo rates, or the rate at which banks lend to the central bank. A hike in policy rate is a signal for banks to increase their lending rates while a reduction is a signal for reducing lending rates.

However, since October, the central bank has reduced its policy rates by 400 basis points, but bank lending rates have not come down correspondingly.
'Governmenmt borrowing to increase'

The RBI had aid yesterday that the government's borrowing programme would be substantially higher in 2009-10 as against a year earlier, irrespective of whether the full budget is presented by the new government or not.