RBI Governor D. Subbarao yielded only slightly to banks’ demands for a rate cut in his annual monetary policy announcement.
He says the long term drivers for growth (demographic dividend, entrepreneurial energy, managerial talent) in the Indian economy are still strong. Inflation levels, while still a concern, have come within the threshold of comfort. Although banks sounded less than enthusiastic about cutting rates after the policy, Subbarao is confident that monetary transmission will happen, even if with a lag of a few months. Excerpts from the interview:
You have cut CRR by 200 bps and repo rate by 125 bps over the past one-and-half years. Yet transmission has been weak and consumers have not got the benefit?
The central bank when it cuts rates is also concerned with the transmission of the policy signal on the lending rates of banks. It would be inaccurate to say that monetary transmission has not taken place. It has been there — although not as much as we would have liked or expected. I believe that the cumulative response to our actions over the last few months is being taken by banks and will be seen in the months ahead.
In hindsight could you have done anything different since banks have not been acting on this signal?
Like cutting more…? I don’t think so. We take these decisions in real time and it is difficult to see what the consequences would have been. So I don’t think our policy stance would have been any different.
Net interest margins for banks have been high. Do you think banks could therefore transmit lower rates for consumers?
Transmission is possible. They have sufficient margins and I think by the sheer pressure of competition they will sacrifice some margins and will transmit the cuts.
After your policy announcement, banks said they won’t be transmitting the cuts?
I think banks interpreted the question on cutting rates to mean whether they would cut rates tomorrow or next week. If you take a slightly long term view, then transmission will take place
Banks were asking for a 50 bps cut in CRR along with repo rate cut…
That is their wish list!
Why didn’t you cut CRR?
We believe that the economy required only a 25 bps cut in repo rate.
We do believe that the liquidity deficit is not a structural one that requires a structural response. That is why there was no CRR action.
You must also recognise that in terms of sheer magnitude the impact of the CRR cut is relatively small.