Mumbai: Reserve Bank Governor D Subbarao Friday said banks will "certainly" cut interest rates in the next three-six months even as he asserted there is "less space" for further softening of key policy rates.
Defending his tough monetary policy in which cash reserve ratio was retained at 4 percent but cut repo rate by a meagre 0.25 percent, the Governor said easing of monetary policy depends on inflation trajectory and improvement on current account deficit.
"If inflation recedes further and faster, if CAD moderates more than we factored in, if the upside risks become more benign, the space would open up for further easing and we will do that. But our current estimate of the macroeconomic environment indicates less space for further easing," Subbarao told reporters at the customary post-policy meeting.
Despite bankers ruling out any lending rate cuts, the Governor expressed confidence that monetary transmission will take place if not immediately but in the medium term.
"We expect transmission to take place. It may not be immediate but certainly will take place...Admittedly, some transmission has already taken place?What we have gathered from banks is that transmission will take place over the next three-six months.
"Monetary transmission of not of just the cut effected this morning, but the cumulative cuts over the past few months," the Governor said.
Soon after the policy announcement, the bankers virtually ruled out lending rate cuts saying their high cost of funds does not allow them to pass on the 25 bps reduction in the policy rates by the apex bank.
The Reserve Bank chief also said Friday's rate cut will help in supporting growth, which is projected to be 5.7 percent in this fiscal.
Referring to the risk factors like inflation, something he has been fighting since October 2010 with a marathon 13 rate hikes, Subbarao said it is close to threshold level of 5 percent and the RBI will try to bring it down to that level.
"Our guidance is that inflation will be around 5.5 percent this fiscal. After a long time, we are in a striking distance of the threshold inflation of 5 percent. Its critical in our view that we consolidate and build on this effort and endeavour to bring down inflation to 5 percent," he said, adding risks like exchange rate fluctuation, suppressed inflation still remain.
He also said the central bank looks at the consumer price inflation along with headline inflation before arriving at its inflation trajectory.
Reiterating his concern over the historic spike in CAD that had hit 6.7 percent in Q3, Subbarao said the current account deficit would be a crucial factor in upcoming policy decisions.
"The CAD is very much on our dashboard? much more than in the past. It will be way above the sustainable level of 2.5 percent. That will be one of the variables that will go into the calculation of the monetary policy going forward," he said.
Talking on the reversal of policy stance from easing to tightening, he said if there is need for the monetary policy to respond, it will not hesitate to do so.
On prospects of growth revival this fiscal, he said though growth may have bottomed out, it will not see a dramatic recovery this fiscal, saying it will be tepid.
Referring to mushrooming of ponzi schemes, Subbarao said RBI has little regulation on non-banking sector like this. He, however, added that the apex bank is trying to spread awareness about such fraudulent schemes along with pushing for provisions to provide financial services to general public.
When asked about the timeline of proposed inflation indexed bonds, he said it will be launched soon.
First Published: Friday, May 03, 2013, 22:07