Banks must pass on rate cuts: Raghuram Rajan

MUMBAI: Home loans and other borrowings will continue to get cheaper with Reserve Bank of India governor Raghuram Rajan stating that banks will pass on benefits of earlier rate cuts to borrowers even as he chose to keep key policy rates unchanged on Tuesday.Rajan’s policy statement, which most bankers termed as dovish, spelt lower inflation targets even as it retained growth numbers for FY16.
Announcing the third bi-monthly monetary policy review in Mumbai, Rajan kept unchanged the policy repo and reverse repo rates — at which RBI lends to and borrows from banks respectively — at 7.25% and 6.25%.
READ ALSO: RBI ignores govt pressure, keeps key rates unchanged
“Since the first rate cut in January, the median base lending rates of banks has fallen by around 30 basis points — a fraction of the 75 basis points in rate cut so far.As loan demand picks up in Q3 of 2015-16, banks will see more gains from cutting rates to secure new lending, and more transmission will take place. The welcome announcement by government of infusion of bank capital into public sector banks will help loan growth and hence transmission, as will current easy liquidity conditions,” said Rajan.
Arundhati Bhattacharya, chairman, State Bank of India, said, “There seems to be a bias towards further rate cuts. The lowering of inflation projection by the RBI in the last quarter is an acknowledgement of a benign inflation trajectory.” She added that softer global commodity prices and better-than-anticipated monsoon will help further.
According to Sunil Kaushal, regional CEO, Standard Chartered Bank, the governor holding on to the rates was in line with expectations as consumer inflation — on the back of higher food prices — has been elevated. “The encouraging note is inflation forecast has been trimmed, which opens up the view for further monetary easing. Though it will depend on the play of domestic and external factors, including commodity prices,” he said.
Hinting at further rate cuts in the future, Rajan said, “We await transmission from our front-loaded past rate actions. We will monitor developments for emerging room for more accommodation.” According to the governor, relative to the projections of the second bi-monthly statement, inflation projections in this bi-monthly statement are elevated by the higher-than-expected June observation but reduced by prospects of softer crude prices and a near-normal monsoon thus far. “This implies that inflation projections for January-March 2016 are lower by about 0.2%, with risks broadly balanced around the target of 6.0% for January 2016,” Rajan said.
On growth, the governor said that prospects have improved as lower inflation will improve real incomes. However, a global slowdown will depress exports and investment in fresh capacity by the private sector and government remains subdued, he said. “On an assessment of the evolving balance of risks, the projected output growth for 2015-16 has been retained at 7.6%,” he said.