RBI chief Subbarao contacts banks on lending rates

27 March 2009

As retail borrowers continue to stagger under high interest rates, Reserve Bank of India governor Duvvuri Subbarao today said that he was talking to various banks to figure out why the lending rates are not coming down despite the central bank cutting the ''key'' rates.

''Policy rates have to be transmitted to lending rates by banks. We are looking into the transmission mechanism,'' Subbarao said. He added that interest rates needed to soften for India to become competitive.

"We have responded appropriately and we will respond appropriately," the RBI chief said when asked if there was a case for further monetary easing as inflation approaches near zero.

India's economic recovery would be swift and sharp, aided by savings and productivity, Subbarao told the Confederation of Indian Industries' annual conference in New Delhi, but did not elaborate on when this would happen.

He said that growth fundamentals are intact and local banks were sound and well-capitalised, while the decline in crude oil prices provides space for the government to spend. He admitted that government borrowings had risen due to economic stimulus packages, adding that next year's borrowing programme would be conducted by the central bank ''in a manner that causes the least disruption''.

'Top-down' effect missing
But other bankers at the function sought to meet Subbarao's query about why these cuts are not percolating downwards. Of late, public sector banks have reduced interest rates on home loans. In the last couple of months, the Reserve Bank of India (RBI) has reduced the cash reserve ratio (CRR), repo rate, and reverse repo rate.
But bankers suggest that a cut in policy rates is no longer linked to softening of interest rates in general.