RBI Said - IT’s Time To Cut Lending Rates

Posted by Deepak

January 28, 2009

The Reserve Bank of India has sent a strong, and unambiguous, message to all banks in the country - cut lending rates. Announcing the third quarter review of the monetary policy for 2008-09, RBI governor D Subbarao said that the central bank’s downward adjustment of all benchmark policy rates over the past three months had given the banking system enough opportunity to further cut lending rates.

The RBI it self left all its benchmark rates untouched. The logic given by the governor was that the central bank had cut rates aggressively in the past three months, bringing them down to “historically lowest level”.

The repo rate at which RBI lends short term fund to banks was brought down from 9% to 5.5%, the reverse repo rate (the rate at which banks park their surplus funds with RBi) from 6% to 4% and the cash reserve ratio (the proportion of money that banks have to mandatorily keep with RBI ar nill interest rate) from 9% to 5% of the total deposit.

But the RBI feels that cmmercial banks have not responded to this bizzard of rate cuts with the same alacrity. Subbarao said: “The transmission of the policy interest rate signal has been effective if the money and government securities market: however, the transmission in the credit market has so far been subdued. In the Reserve Bank’s view, the policy easing done by it in the last few mopnths allow for considerable room for banks to respond more actively to the policy cues”.

The RBI governor also pointed out that while most public sectror banks had responded to rate signals, the private and foreign banks had displayed considerable reluctance.