With reference to the editorial, "RBI must give clear guidance on rates" (December 23), the transmission of monetary policy and its influence on the rates of interest in the market seldom take place due to inherent and historical weaknesses in the banking system. This cannot be attributed to the Reserve Bank of India's perceived lack of clarity on policy rate guidance and communication to the banks on the need to transfer the benefits of rate cuts to borrowers.
Price stability has always been the core objective of the RBI's monetary policy. Of late, this has been well articulated in the form of an inflation target among other things, and presented to banks to adhere to. While the need to reduce the interest rate and cost of funds is paramount to boost investment and growth, banks are not in a position to cut the interest rate due to some compulsions. These pertain to maintenance of high net interest margin of around three per cent - unheard of in advanced countries - and lack of professionalism in the overall conduct of business, taking into account the dynamics of both domestic and foreign markets that have a bearing on their profitability and availability of automatic cross subsidisation of losses by depositors, the government and other stakeholders.
As the current base rate is not based on a scientific calculation and is far from being aligned with the Wholesale Price Index and the Consumer Price Index, banks have the excuse to not fully transmit the RBI policy rate because the dynamism expected of them is practically absent and they have not graduated to adopt the modern and scientific calculations of various parameters. From this angle, the RBI's proposal of marginal cost of funds-based lending rate is an intelligent one. Over time, banks would be compelled to turn professional to remain in business.
A beginning has to be made somewhere. Perhaps the marginal cost approach to lending can become the game changer. Banks may have no option but to fall in line to comply with the transmission of monetary policy in letter and spirit.
T V Gopalakrishnan Bengaluru
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