RBI ignores govt pressure, keeps key rates unchanged

MUMBAI: Rebuffing pressure from the government to reduce cost of borrowing, Reserve Bank of India governor Raghuram Rajan on Tuesday kept key policy rates unchanged.
Rajan, however, said that cost of funds will come down for borrowers as banks are expected to pass on benefits of the earlier rate cuts.
Announcing the third bi-monthly monetary policy review in Mumbai, Rajan kept unchanged the policy repo and reverse repo rate – the rate at which RBI lends to and borrows from banks respectively – at 7.25% and 6.25%.
"Since the first rate cut in January, the median base lending rates of banks has fallen by around 30 basis points, a fraction of the 75 basis points in rate cut so far. As loan demand picks up in Q3 of 2015-16, banks will see more gains from cutting rates to secure new lending, and more transmission will take place. The welcome announcement by government of infusion of bank capital into public sector banks will help loan growth and hence transmission, as will currently easy liquidity conditions," said Rajan.
A top finance ministry official had on Monday pitched for the fourth interest rate cut this year, saying inflation can not be the sole driving factor in deciding on monetary policy action.
Rajan, however, hinted that rate cuts may happen in future. "We await transmission from our front loaded past rate actions, we will monitor developments for emerging room for more accommodation," Rajan added.
According to the governor, relative to the projections of the second bi-monthly statement, inflation projections in this bi-monthly statement are elevated by the higher than expected June observation but reduced by prospects of softer crude prices and a near-normal monsoon thus far. "This implies that inflation projections for January-March 2016 are lower by about 0.2%, with risks broadly balanced around the target of 6.0% for January 2016," Rajan said.
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On growth, the governor said that prospects have improved as lower inflation will improve real incomes. However, a global slowdown will depress exports and investment in fresh capacity by the private sector and government remains subdued, he said. "On an assessment of the evolving balance of risks, the projected output growth for 2015-16 has been retained at 7.6%," he said.
The Reserve Bank of India (RBI) has already reduced the policy rate by a total of 75 basis points, or 0.75 per cent, since January, when it embarked on an easing cycle.
The banks, however, have passed on only 0.3 per cent to borrowers, Rajan said.
Top public sector lender SBI on Tuesday ruled out any interest rate cut for its borrowers, even as the RBI chided banks for not having passed the full benefits of the last three reduction in its policy rate.
SBI chairperson Arundhati Bhattacharya said any rate cut by the bank would depend on a lot many factors including credit growth and she does not see any room for any cut in the near future.
(With inputs from agencies)