RBI Wants Banks to Cut Lending Rates to Bring Down EMIs

Reserve Bank Governor Raghuram Rajan asked lenders to start cutting interest rates following the 25-basis point reduction in repo lending rate announced on Tuesday.

Noting that banks have started passing through some of the past rate cuts into their lending rates, Dr Rajan said, “Banks should pass through the sequence of rate cuts into lending rates.”

This is the second straight policy when Dr Rajan openly asked lenders to lower interest rates. In April, the governor had come down heavily on banks, saying the notion that cost of funds have not gone down is “nonsense”.

Most lenders, led by State Bank of India, cut their base rates (minimum lending rates) by 15-20 basis points following Dr Rajan’s comments in April. As a result, equated monthly installments (EMI) on home loans started inching downwards from April.

Analysts say it would have been easier for banks to cut lending rates had the RBI taken steps to free up liquidity. Most bankers wanted the RBI to slash the cash reserve ratio (the amount of cash banks must keep with RBI) or the statuary liquidity ratio (another key reserve requirement), which would have freed-up idle cash.

But the RBI retained CRR at 4 per cent and SLR at 21.5 per cent in Tuesday’s policy announcement. It is for this reason that bankers did not commit to an immediate rate cut post the repo lending rate cut announcement today, analysts say.

“You know we did a base rate cut last month…We’d like to see in the next two or three weeks what the action is in the market and accordingly we’ll take action. I have to say that demand for credit remains weak. So probably the passing on too will also come in due course of time,” said Ranjan Dhawan, CEO of Bank of Baroda.