 "RBI governor puts onus on banks to transmit policy rates")
The Reserve Bank of India (RBI) governor Raghuram Rajan in his first bi-monthly monetary policy statement said that they are waiting to see transmission take place. He also refuted notions that the marginal cost of funding has not fallen.
"I do not see an environment where credit growth is tepid, banks are sitting on money so to speak and their cost of funding, their marginal cost of funding, has fallen. The notion that it hasn't fallen is nonsense. It has fallen," he said.
Rajan further said that they (banks) can borrow at the margin today at 7.5% and that there is plenty of liquidity in the market.
"At some point the competitive pressures will tell. I have no doubt that this will happen. If it happens sooner, it will be better for the economy. But banks have to take their own decision," he said.
"At some point the competitive pressures will tell. I have no doubt that this will happen. If it happens sooner, it will be better for the economy. But banks have to take their own decision," he said.
Several large banks have cited higher cost of funds as the reason for not being able to reduce the interest rates.
The banking regulator in the policy has said that for monetary transmission to occur, lending rates have to be sensitive to the policy rate. With the introduction of the Base Rate on July 1, 2010 banks could set their actual lending rates on loans and advances with reference to the Base Rate.
At present, banks are following different methodologies in computing their Base Rate – on the basis of average cost of funds, marginal cost of funds or blended cost of funds (liabilities).
Base Rates based on marginal cost of funds should be more sensitive to changes in the policy rates. In order to improve the efficiency of monetary policy transmission, RBI said that it will encourage banks to move in a time-bound manner to marginal-cost-of-funds-based determination of their Base Rate.
Base Rates based on marginal cost of funds should be more sensitive to changes in the policy rates. In order to improve the efficiency of monetary policy transmission, RBI said that it will encourage banks to move in a time-bound manner to marginal-cost-of-funds-based determination of their Base Rate.
In its monetary policy statement, RBI said that transmission of policy rates to lending rates has not taken place so far despite weak credit off take and the front loading of two rate cuts.
"With little transmission, and the possibility that incoming data will provide more clarity on the balance of risks on inflation, the Reserve Bank will maintain status quo in its monetary policy stance in this review." it added.
"With little transmission, and the possibility that incoming data will provide more clarity on the balance of risks on inflation, the Reserve Bank will maintain status quo in its monetary policy stance in this review." it added.
The central bank also said that comfortable liquidity conditions should enable banks to transmit the recent reductions in the policy rate into their lending rates, thereby improving financing conditions for the productive sectors of the economy.