The soft monetary policy stance of the RBI in the face of inflation turning to near zero, could not be fully passed on the customers as banks grappled with the high cost deposits, Economic Survey said.
Despite monetary policy becoming accommodative in third and fourth quarter, decline in interest rates were not up to the industry expectations, said the Survey tabled in Parliament today.
Though nominal rates eased by 100-150 basis points, real rates continued to be high, it said.
Moreover, it said, the expectation that there could be further cuts in policy rates and in lending rates may have resulted in investment decisions being deferred.
Blaming structural rigidity coming in the way of reduction in the lending rate, the survey said, it may have been reinforced in recent years due to a high credit demand encouraging the banks to raise deposits at higher rates for maintaining long term liquidity.
"These high rates have now come in the way of cutting lending rates at a pace which is consistent with the current outlook on inflation and the need for stimulating demand," it said.
The repo rate, the rate at which RBI lends to banks, was reduced by 4 per cent in five tranches from 9 per cent August 2008 to 5 per cent in the beginning March 5, 2009.
The Reverse Repo Rate, the rate at which central bank borrows from banks, was lowered by 2.5 per cent in three tranches from 6 per cent (as on Novemeber 2008) to 3.5 per cent from March 5, 2009.
Also Read
At the same time Cash Reserve Ratio was slashed by 4 per cent in four tranches to 5 per cent from 9 per cent while Statutory Liquidity Ratio was soften by one per cent to 24 per cent to pump in liquidity in the system.
The survey also noted that the surge in domestic inflation in first and second quarter of calendar year 2008 reinforced the tightening of monetary policy, a trend that was already underway.
It affected the cost and availability of funds for investment, it said.
Secondly, since inflation was largely on account of metals and fuels (or intermediates and basic goods), bulk of it was absorbed by industry, which affected its internal accruals and profitability, reducing to that extent the investible funds.