By bringing down the repo rate from 7.25 to 6.75 per cent, the Reserve Bank of India governor has taken a pragmatic approach to boost economic activity. Following the repo cut, the largest lender (State Bank of India) immediately transmitted 40 basis points by reducing the base rate to 9.3 per cent. This has set an example for other lenders to pass on the benefit without delay. At this juncture, the public and private sector lenders need to revisit the status with regard to transmission of previous rate cuts by the RBI during 2014-15 and must act fast to ensure full transmission of the repo cuts.
While passing the effects of the rate cuts, banks need to refrain from cutting deposit rates, else it would adversely affect the growth of household savings. The effects of the cut in the lending rate will ease servicing of debts and will reduce the incidence of loan delinquencies, which will, in turn, augment the yield on these assets. Lenders need to be more focused on the recovery of bad assets to enable them to realise the pending interest income so that they can refrain from reducing the deposit rates. The government must encourage implementation of result-oriented measures and extend maximum support to the banking industry. The repo rate cuts should be used as one of the tool to achieve that goal.
V S K Pillai Kottayam
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