Reserve Bank Governor Raghuram Rajan's decision to keep the cash reserve ratio unchanged at 4 per cent has come in for criticism from former SBI chairman Pratip Chaudhuri.
The RBI has kept the CRR - is the portion of deposits that lenders must keep with the RBI - unchanged since early 2013; analysts and bankers have been pushing for a CRR cut as a precursor for effective transmission of monetary policy. Notably, none of India's big banks have cut lending rates despite RBI resorting to back-to-back repo cut earlier this year.
A cut in repo rate is like "prices of lemons falling in the overall kitchen budget" for lenders, the 62-year-old Mr Chaudhuri said. Repo cut won't help banks to lower rates as its (repo rate) total contribution in a bank's total cost of funding remains insignificant, he added.
Madan Sabnavis, chief economist of Care Ratings, said a 1 per cent cut in cash reserve ratio would have released Rs 80,000 crore into the banking system, helping bring down interest rates immediately.
Dr Rajan on Tuesday held repo rate steady at 7.5 per cent, but implored banks to cut lending rates. "The sooner rate transmission happens, better it is for the economy."
In his post-policy press conference, Dr Rajan also had some harsh words for banks for not cutting their lending rates. The notion that banks' cost of funds hasn't fallen is "nonsense." "When banks have to raise rates, they quote higher policy rates... Why don't they cut when policy rates go down," he said.
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