With repo cut & MCLR, money is significantly cheap now: Rajan

Stating that borrowing rates will come down further, RBI Governor Raghuram Rajan today said the 0.25 per cent rate cut should be looked in conjunction with the new loan pricing method that has already resulted in lending rates coming down by up to 0.50 per cent.
"Don't look at the monetary policy review as 25 bps (cut alone). Look at the composite of measures (marginal cost of funding-based lending rate methods effective April 1), they all add up. Borrowing rates are coming down significantly in the economy," Rajan told reporters.
He said a review of 26 large banks, accounting for 80 per cent of assets, has shown that overnight borrowing rates are down by 0.50 per cent while for up to a period of three years, the cut is at least 0.25 per cent.

"Policy action is significantly greater today than just another 0.25 per cent cut in the repo. Borrowing is now significantly cheaper and will continue to get so," he reiterated and sounded dovish that RBI will remain accommodative going forward if inflation remains under check.
He further said the slew of liquidity measures announced today will lead to a better transmission of the policy into actual lending rate cuts by the banks.
With the Monetary Policy Report, released along with the policy, estimating a push of 1-1.50 per cent in headline inflation numbers due to implementation of the 7th pay panel report, deputy governor Urijit Patel said a bulk of it is due to the steep rise in house rent allowances and RBI will "look through" such fanning. This upside risk will persist through the next 24 months or so.

The immediate impact on inflation is forecast if the report is implemented in the second half of the financial year, the report said, adding the pay panel report will boost the economy by around 40 per cent.

The report also noted that the overall impact will be lower than that of the sixth pay panel, as there is no arrears component in the current report.
Patel said the liquidity measures taken today are aimed at creating an enabling atmosphere to move to a working where the 14-day repo becomes the operational rate rather than the current overnight repo, as was suggested by a committee headed by him to be the second phase of reforms.

On the impact of inflation from rural boost, especially with the highest-ever budgetary allocation of over Rs 39,000 crore to the rural wage scheme, Rajan said we should not be very concerned as rural economy has been facing a difficult time due to successive droughts.
With concerns being expressed on maturing of over USD 30
billion in foreign currency non-resident deposits (FCNR-B) and currency swaps raised during rupee crisis during 2013 summer, Rajan today assured that they are fully covered with RBI's forward purchases.
He also made it clear that it was an one-time arrangement where leeways were granted for getting forex in and RBI is not planning a reintroduction of any similar scheme now.

Rajan further made it clear that he does not expect any volatility because of these funds getting matured, but will still watch out for developments, adding those who want to rollover are free to do so.
"But I don't expect any major rollovers," the governor said.
On strategic debt restructuring, wherein banks are allowed to take control of a defaulting company, Rajan said the instrument is being reviewed constantly and RBI has already asked banks to start acting as soon as they take a call to invoke the SDR.
He was also quick to add that banks should not let the existing management to continue after the takeover.

"As soon as the SDR is invoked, we want banks to immediately move on and take over the management because letting the existing management continue defeats the whole purpose of the SDR scheme," Rajan said.
The governor said he is satisfied with the progress of the balance-sheet cleanup undertaken by the banks following an one-time asset quality review of the central bank under which it identified as many as 150 top distressed accounts and asked banks to provide for them as NPAs.
In cases like Kingfisher Airlines, Rajan said RBI is cooperating with investigative agencies like CBI and the ED, but underscored the need to establish bankers' criminality based on the malfeasance and not take action if external factors would have affected a loan.

He warned that any action for non-criminal behaviour by bankers will lead to an aversion to risk-taking and can "chill" the banking sector and the lending process, which in turn will chill the economy.
Rajan also defended RBI's move to keep names of defaulters sealed, saying only wilful defaulters' names shall be exposed and the reputations of the ones who have defaulted due to circumstances beyond their control should not be tarnished. Because any such behaviour can make businessman risk-averse and bankers from lending, he warned.
Disclosing the name of such defaulters can create a loss of business and "chill economic activity", he said.