India monetary policy Central bank holds steady for 7.4% growth

“Since the rate reduction cycle commenced in January, less than half of the cumulative policy repo rate reduction of 125 bps has been transmitted by banks”, he said.

The RBI’s reference to incipient inflationary pressures and the easing of the front-loading of monetary policy suggests that the central bank’s future policy decisions will be guided by its view on the growth and inflation impact of the implementation of the Seventh Pay Commission recommendations, as well as by fiscal policy and structural reform measures. The government will have to keep an additional Rs 1 lakh crore for the revised wage bill. “We’re also vigilant”, Rajan told a press conference soon after unveiling the policy update to queries if there was a change of stance in the RBI’s outlook.

Elsewhere, in the policy statement, even after appreciating the apex bank’s concerns about policy transmission, the issues around rate transmission by banks have to be seen from a broader prism.

“Banks are now engaged in the process of cleaning up their balance sheets and as they clean them up, they will have more rooms for lending”.

India is taking steady steps towards an increasingly free currency, Reserve Bank of India governor Raghuram Rajan said on Tuesday, but it will avoid a “big bang” liberalisation. And our worry is that it should not come in the way of banks to pass through lower lending rates to customers.

He also announced that RBI will shortly finalise the methodology for base rate calculation as per the marginal cost of funds which will be mandatory for banks.

The RBI governor has been cautiously lowering interest rates, worrying about the impact of inflation.

In his Fifth Bi-monthly Monetary Policy Statement, 2015-16, he said the RBI would continue with daily variable rate repos and reverse repos to smooth liquidity. “Basing our advances on overnight lending rate would be too volatile and virtually making the rates becoming very uncompetitive when short term rates go up”, said V G Kannan, managing director, SBI.

Data released on the previous day revealed that gross domestic product expanded at a 7.4% clip in the third quarter of 2915, below New Delhi’s target for annual growth of between 8.0%-8.5%.

India’s economy is sending contradicting signals, which represent a dilemma for the country’s central bank. “We do not have a reliable benchmark except the overnight interbank lending rate”. Easing interest rates will be key to support a consumption-led growth pick-up. “But that has been coming down over the a year ago or so”, he said.

“However, bankers say high interest rates on small savings schemes (8% to 8.5%) give little leeway for banks to cut interest rates on their retail term deposits where the rates range between 8% and 8.5 % for a one-year deposits”.