Reserve Bank Governor D Subbarao today said banks will "certainly" cut interest rates in the next three-six months even as he asserted there is "less space" for further softening of key policy rates.
Defending his tough monetary policy in which cash reserve ratio was retained at 4 per cent but cut repo rate by a meagre 0.25 per cent, the Governor said easing of monetary policy depends on inflation trajectory and improvement on current account deficit.
"If inflation recedes further and faster, if CAD moderates more than we factored in, if the upside risks become more benign, the space would open up for further easing and we will do that. But our current estimate of the macroeconomic environment indicates less space for further easing," Subbarao told reporters at the customary post-policy meeting.
Despite bankers ruling out any lending rate cuts, the Governor expressed confidence that monetary transmission will take place if not immediately but in the medium term.
"We expect transmission to take place. It may not be immediate but certainly will take place...Admittedly, some transmission has already taken place�What we have gathered from banks is that transmission will take place over the next three-six months.
"Monetary transmission of not of just the cut effected this morning, but the cumulative cuts over the past few months," the Governor said.
Soon after the policy announcement, the bankers virtually ruled out lending rate cuts saying their high cost of funds does not allow them to pass on the 25 bps reduction in the policy rates by the apex bank.
The Reserve Bank chief also said today's rate cut will help in supporting growth, which is projected to be 5.7 per cent in this fiscal.
