Raghuram Rajan keeps rates intact; blasts banks for being stingy on cuts

In the third bi-monthly policy review of this fiscal, RBI kept the benchmark repurchase rate (at which RBI lends to the system) at 5-year low of 6.50 percent.

Raghuram Rajan keeps rates intact; blasts banks for being stingy on cuts

Mumbai: Staying put on his inflation-focussed monetary policy, outgoing RBI Governor Raghuram Rajan on Tuesday kept key rates unchanged citing upside risk to prices of food and services even as he said the central bank remains 'accommodative' and blamed banks for being tight-fisted in passing on previous rate cuts.

Banks, however, ruled out any immediate lowering of rates for retail borrowers and industry, which has been pitching hard for steps to make the capital cheaper to push growth.


In the third bi-monthly policy review of this fiscal, RBI kept the benchmark repurchase rate (at which RBI lends to the system) at 5-year low of 6.50 percent. This is the second review in a row when Rajan has maintained the status quo.

The reverse repo rate, which is paid to banks, remains 6 percent, while Cash Reserve Ratio will stay at 4 percent.

Stock markets reacted negatively, though RBI hoped to meet inflation target of 5 percent for March 2017 and maintained its GDP growth forecast at 7.6 percent despite a weak global economic scenario.


Presenting his last monetary policy review, Rajan, who has decided to return to academia after end of his three-year tenure on September 4, came down heavily on banks for "only modestly" passing on the benefits of previous five policy rate cuts since January 2015, on one pretext or the other.

He said "easy liquidity conditions" and market competition should prompt banks to lower the rates, while announcing that changes are underway to the way banks decide their lending rates. He apprehended however that lenders would list yet another 'concern' for keeping rates high.

Rajan, whose tenure at RBI has been marked with a string of controversies with some accusing him of focussing too much on inflation at the cost of growth, sought to make light of his critics saying he has also been getting 'anonymous thank you notes' even while on plane. He exuded confidence that measures taken by RBI during his term would continue to show positive results.

He said the new rate-setting regime under a six-member Monetary Policy Committee - a cause he championed - should be in place before the next review on October 4. That would make today's review the last one to be led by the Governor alone.

Rajan, former IMF Chief Economist and on-leave Professor of Finance at Chicago University, said the clean-up process of the banks' balance sheets is on track.

Giving rationale for keeping rates intact, RBI said risks to the March 2017 target of 5 per cent for headline inflation, which climbed to 22-month high of 5.8 percent in June, "continue to be on upside" on factors like food inflation, services and the effect of 7th Pay Commission implementation for government employees.

"It is appropriate for RBI to keep the policy repo rate unchanged at this juncture, while awaiting space for policy action," Rajan said at the customary post-policy press conference.

"We have kept rates on hold, maintaining an accommodative stance while we await developments. We are within the inflation band given to us by the Government and expect to be around 5 percent CPI inflation by March 2017, absent unforeseen eventualities," he added.

The strong sowing and the positive progress of the monsoon augurs well for the food inflation, RBI said, adding that prices of pulses and cereals are rising.

Complaining that banks have passed benefits only in a "modest" measure, Rajan said a pick-up in credit demand, which would follow the economic recovery and competition for corporate loans after the ongoing balance sheet clean-up by the state-run lenders, will ensure softer lending rates.

Rajan charged bankers with inventing newer excuse for delaying the rate cuts and pointed out that concerns over the FCNR(B) redemptions, despite RBI's public assurance of making it non-disruptive, are the latest one in a series.

"Earlier, some bankers said it was lack of liquidity that was holding the rates high. Now, I hear from some that it is the fear of FCNR redemptions that is making them reluctant to cut rates. I have a suspicion that some new concern will crop up once FCNR redemptions are behind us," Rajan said.

"We would be happier if there was more transmission," he said, adding that RBI is sensitive to "some of difficulties" which banks have to face following the balance sheet clean-up.

He said RBI will soon revise the marginal cost of funds- based lending rate framework for faster policy transmission.

Bankers, however, ruled out any immediate cuts and said interest rates will fall only once credit growth picks up.

"We believe transmission of rates will happen gradually over the next few months as credit growth picks up pace," SBI chairperson Arundhati Bhattacharya said.

ICICI Bank's Chanda Kochhar welcomed the continued accommodative policy stance, as also the measures to ensure adequate liquidity, but refrained from promising any rate cut.

With the system staring at an outflow of USD 26 billion in foreign currency deposits (FCNR-B), raised when the rupee was bleeding in September-November period of 2013 following the 'taper tantrums' in the summer of that year, Rajan sought to assuage concerns of the banking system saying RBI will ensure there is no market disruption because of it.

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