Rajan for faster transmission of RBI rate cut

Mumbai: After lowering the interest rate by 50 basis points to boost economy, Reserve Bank Governor Raghuram Rajan on Tuesday said the RBI will work with the government to ensure a faster transmission and also hoped that banks will pass on the benefits to customers.

In a surprise move, the RBI reduced the key interest rate by 50 basis point to 6.75 percent from 7.25 percent.

"We believe that some (monetary policy transmission) would take place very soon and more will take place over time," Rajan said during the customary post policy meeting with the reporters.

So far in the current year RBI has reduced repo rate by 125 basis points. Earlier, the repo rate was reduced in three tranches of 25 basis points each.

Rajan said markets have transmitted the RBI's past policy actions via commercial paper and corporate bonds, but banks have done so only to a limited extent.

The median base lending rates of banks have fallen by only about 30 basis points despite extremely easy liquidity conditions, he said.

"This is a fraction of the 75 basis points of the policy rate reduction during January-June, even after a passage of eight months since the first rate action by the RBI. Bank deposit rates have, however, been reduced significantly, suggesting that further transmission is possible," the Governor said in the policy.

Rajan said the RBI wants to encourage faster transmission and will do what is needed for it to happen.

"We are going to work very hard with the government. The intent here is not to point finger other people but to start moving quickly on ensuring that the transmission does takes place," he said.

He said the RBI wants to create the conditions which will include changes in calculation of the base rate, and also some government actions such as reviewing the small savings interest schemes.

"The intent is to move together and move forward so that transmission takes place," he added.

Earlier this month, the RBI had put out draft guidelines on computation of base rate based on marginal cost of funds methodology.

It had asked for comments on the draft guidelines.

The RBI today said the final guidelines on base rate calculation will be issued by end of November 2015.