RBI monetary policy: Raghuram Rajan retains key rates, nudges banks to pass on earlier cuts

Raghuram Rajan said there is more room for rate cut by banks as the lenders on an average have only passed less than half of the 1.25 percent reduction announced so far during 2015.

Mumbai: Promising to remain "accommodative" as long as inflation remains under control, RBI Tuesday kept its policy rate unchanged even as Governor Raghuram Rajan nudged banks to pass on the benefits of earlier cuts to borrowers.

Rajan said there is more room for rate cut by banks as the lenders on an average have only passed less than half of the 1.25 percent reduction announced so far during 2015.

Announcing his fifth bi-monthly monetary policy review of this fiscal, the RBI Governor also said the economy is "truly in a recovery mode" as he left the the repo and the CRR unchanged at 6.75 and 4 percent, respectively.

While the government termed the review as "balanced", experts said that any further movement of rates by RBI would depend on the much-awaited decision by the US Federal Reserve on December 16, where it is widely expected to begin a rate-hike cycle. Besides, the RBI would keenly watch the domestic data on inflation, which has seen an uptick recently.

The market was expecting a status quo in view of the rise in retail inflation and a likelihood of capital outflows on a possible US Fed rate hike later this month. Retail inflation rose to 5 percent in October on costlier food items such as pulses, matching RBI's target for March 2017.

"Uptick in CPI inflation excluding food and fuel for two months in succession warrants vigilance," Rajan said, as he hinted at easing rates as and when room is available.

Stating that inflation is expected to accelerate till December before plateauing, Rajan said it may follow RBI's projected path "with risks slightly to the downside".

The Reserve Bank, he said, "will use the space for further accommodation, when available, while keeping the economy anchored to the projected disinflation path that should take inflation down to 5 percent by March 2017".

Bankers on their part hinted at lower borrowing costs going forward, as they sensed Rajan's resolve to make them calculate base rates on the basis of marginal cost of funding.

ICICI Bank chief Chanda Kochhar said, "As impact of monetary policy steps taken so far play out in terms of bank funding costs,lending rates are expected to continue to fall."

SBI Chief Arundhati Bhattacharya was non-committal. In a statement, she said, "Today's policy undertone has leaned towards the neutral-to-dovish side. The Governor's indication of being accommodative policy sends a positive signal for the economy."

On the proposed new guidelines to calculate the base rate based on marginal cost of funds, Bhattacharya said "appropriate actions will be taken on the same".

On the banks facing huge bad debts, Rajan said steps taken by the central bank and the government should help lenders clean up their balance sheets by March 2017.

The RBI Governor said banks have been given more powers and flexibility to deal with bad loans, which have crossed 6 percent as of the June quarter.

The gross NPA of the public sector banks rose to 6.03 percent as of June 2015 from 5.20 percent in March 2015.

The RBI Governor said the second quarter GDP growth indicates early signs of recovery but the central bank will stick to its earlier projection of 7.4 percent economic growth for the current fiscal with a marginal downward bias.

Rajan also expressed anguish at the banks' reluctance to pass on the benefits of the earlier rate cut actions to the borrowers, saying the median decrease in the base rates over the course of the year has only been 0.60 percent as against the RBI's 1.25 percent cut in the repo rate since January.

Rajan who has been chiding bank since February for not passing on the rates today said he will make them do so by introducing the marginal cost as the basis for calculating the base rate the norms for which will be issued later this week.

"Since rate reduction cycle that began in January, less than half of the cumulative policy repo rate cut of 125 bps has been transmitted by banks. The median base lending rate has declined only by 60 bps since then," Rajan said.

Explaining the rationale, Rajan told reporters: "there is a particular way to calculate the base rate now. And our worry is that it should not come in the way of banks to pass through lower lending rates to customers. That is why we took a relook at the base rate and are coming to marginal cost pricing which we will be announced later this week."

India Inc too today asked bankers to fully pass on the previous rate cuts as RBI has left the policy rates unchanged.

"We would like banks to pass on full benefits in the form of lower lending rates for both consumers and investors. This is important for revving up overall demand in the economy, which is still far from being robust," Ficci said.

Similarly, CII also said, "The focus has now shifted to transmission of lower policy rates to lending rates. Banks need to be ready to finance pick up in credit growth and RBI should ensure high level of NPAs do not constrain banks from financing higher growth."

Stating that the marginal cost of pricing makes the costs

flow through into lending rates faster, Rajan said, "The intent is that banks would be able to make incremental loans on the marginal cost pricing while historical or legacy loans will be on the base rate. That's the intent as we go forward."

On the economy which showed signs of recovery in the July-September quarter at 7.4 percent, led by a solid 9.3 percent growth in manufacturing, Rajan said "what we have is an economy which is well and truly in recovery, but with areas of weakness. Hopefully, as we go forward, some of the areas of weakness will turn around".

The government had yesterday said the GDP clipped at 7.4 percent in the September quarter, or 7.2 percent in the first half. The government has projected 7.6 to 7.8 percent growth this fiscal while the RBI has pegged it down at 7.4 percent today with a negative bias.

However, Rajan, whose anti-inflation stance had earned him flak from pro-growth advocates, also declined to take credit for the economic growth though it has been nearly a year since the central bank shifted its hawkish stance, saying a variety of factors, including a "feel good" environment created by the government and the surge in public investments, have helped the economy turnaround.

"What causes growth? It's a mix of factors. I would be far from claiming credit for the monetary policy," he said.

When reminded of the flak he received, Rajan retorted saying "that doesn't mean I should take credit when growth takes place. We are all working together to ensure that growth takes place, and it is in our collective interest; and I will emphasise again, the RBI is not against growth. We need sustainable growth and we will ensure maximum sustainable growth we can get," he said.

On the status quo stance adopted today after front-loading with a 50 bps surprise repo cut in the last policy, Rajan explained that "our sense, which is why we cut interest rates last time, was that the balance of risks -- how much we are wanting to do for energising growth versus how much we have to be worried about inflation -- allowed us to reach the policy stance that we did last time which we have maintained this time."

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