Springing a surprise, the Reserve Bank of India (RBI) on Tuesday cut its short-term lending rate by 50 basis points, but made a pitch for passing it on to consumers in the form of cheaper personal and commercial credit. Stakeholders expected a 25-basis-point cut.
Soon after the rate cut announcement, the country's largest lender, the State Bank of India (SBI), said it would cut its base rate by 40 basis points effective October. A similar indication was given by some other banks, notably ICICI Bank.
As per Tuesday's decisions, the repurchase rate, or the interest charged on short-term borrowings, was cut to 6.75 per cent. But it is clear that it will take commercial banks to lower their own lending rates for personal, automobile, housing and corporate loans to also get reduced, translating into lower EMIs.
The indexed reverse repo rate, or the interest payable by the central bank on short-term deposit, automatically stood reduced to 5.75 per cent. There was no cut in the 4 per cent cash reserve ratio that banks have to maintain in the form of liquid assets and designated government securities.
"Markets have transmitted Reserve Bank's past policy actions via commercial paper and corporate bonds, but banks have done so only to a limited extent," Reserve Bank Governor Raghuram Rajan said in the fourth bi-monthly monetary policy statement for the current fiscal year.
"Median base lending rates of banks have fallen by only about 30 basis points, despite extremely easy liquidity conditions," the governor said. "This is a fraction of the 75 basis points of the policy rate reduction during January-June, even after a passage of eight months since the first rate action by the Reserve Bank. Bank deposit rates have, however, been reduced significantly, suggesting further transmission is possible."
The RBI also scaled down its earlier estimate of the country's GDP growth for the current fiscal to 7.4 per cent from 7.6 per cent. It cited lack of new private investment, banks' stressed assets and waning business confidence as reasons for this revision.
"Underlying economic activity, however, remains weak on account of the sustained decline in exports, rainfall deficiency and weaker than expected momentum in industrial production and investment activity," Rajan cautioned.
