Govt expects banks to respond to RBI move, cut rates soon
09 April 2016
Banks are expected to reduce lending rates over the next few days, following up the Reserve Bank of India's reduction in its policy repo rate and other measures to ease liquidity in the banking system, economic affairs secretary Shaktikanta Das said on Friday.
RBI on Tuesday cut repo rate – the rate at which it lends to banks - by 25 bps to a 5-year low of 6.5 per cent, besides announcing a raft of steps to ease liquidity.
The RBI has so far cut its repo rate by 150 basis points since the beginning of last year. Banks, however, have only lowered their lending rates by around 60 bps so far, preventing a wider spread of the benefits of RBI's rate cuts.
Banks say they cannot bring down lending rates immediately as they cannot effect a simultaneous reduction in deposit rates.
The finance ministry, however, wants to move towards a low interest regime that would support business and enterprise.
Government has been nudging RBI and the banks to reduce lending rates in order to cater to the demands of business and industry. Das said banks are expected to cut interest rates over the next few days, in light of the recent monetary policy easing by the Reserve Bank of India (RBI).
"Banks are autonomous and the government has given very strong signal by maintaining the fiscal deficit at 3.5 per cent and resetting small savings rates. RBI has reduced the policy rate by 25 basis points. One would expect banks to take a policy call and I am sure they would do it in days and weeks to come," Das said on the sidelines of an event here.
Banks are now also expected to do effective transmission of rates, he said, adding that part of it has already been done by adopting the Marginal Cost of Funds-based Lending Rate (MCLR) and reducing the rate of interest marginally.
"We would expect the banks to do a more effective transmission of rates. I do expect banks to take steps in that direction," he said.
Das further said India is moving towards a low interest rate regime as inflation is under control.
"We are looking at a regime of low interest rates, thanks to inflation being under control and various measures which the government has taken. The finance minister has given a very strong message that India should move to a low interest regime by sticking to the fiscal deficit of 3.5 per cent," he added.