Banks have till June passed on to consumers only 29 basis points of the 75 basis points in RBI rate cuts, Reserve Bank of India Governor Shaktikanta Das said on Wednesday, urging them to do more on monetary policy transmission by cutting lending rates.
Lowering the cost of borrowing can result in fresh investments and push up growth in the Indian economy, said Das after RBI's monetary policy committee effected a 35 basis-point rate cut to bring the repo rate to 5.4 percent. Cumulatively, the central bank has reduced the benchmark rate by 110 basis points in 2019 so far.
Banks have taken this stance despite financial markets, on which they depend for money, moving in tandem with RBI actions and fully absorbing the rate cuts, the governor said. He, however, was quick to dismiss allegations that the banks have formed a cartel to keep lending rates high.
"We expect higher transmission of policy action and stance by the banks in the weeks and months ahead," said Das. "Our interactions with various stakeholders, including public and private sector banks, indicate that steps are being taken by them on an ongoing basis to progressively lower interest rates, so that the benefits of RBI rate cuts are fastened to the economy.”
The RBI governor had in the past few months met representatives of public and private sector banks over monetary policy transmission. Holding on to higher interest rates helps banks to expand on net interest income and profit.
According to Das, financial markets across categories are reflecting the RBI rate cuts.
"...policy impulses have been transmitted through financial markets fully. The weighted average call money rate has declined by 78 bps, market repo rate by 73 bps and 10-year benchmark by 102 bps," he said.
To a question on why RBI is not moving ahead with the plan to link banks' lending rates to external benchmarks, Das said that while banks are slowly emerging from the bad loan mess, their falling deposit growth doesn't make it suitable to shove RBI rate cuts down their throats.
When asked if the shift to external benchmarks is off the table, he said: "We are again having stakeholder consultations and we have put it for review."
The linking of external benchmarks with bank lending rates was supposed to start in April, but there has been no progress on the same, except a few moves by State Bank of India.
"We are monitoring the situation and RBI will take whatever steps that are required to ensure (monetary policy) transmission," Das said.
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