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Banks want RBI to do more than just cut rates to spur lending

Bankers say the Reserve Bank of India should take steps to boost liquidity in addition to delivering a widely expected interest rate cut next week if it hopes to see lower lending rates and a pick-up in credit growth.

Lenders’ failure to fully pass on the RBI’s two interest rate cuts this year has been a major frustration for policy makers.

Commercial banks blame the central bank’s tight grip on liquidity for keeping the cost of funds high, a claim Governor Raghuram Rajan dismissed as “nonsense” at the April policy review.

Rajan has maintained that there’s sufficient cash and has publicly ruled out major moves like a cut to lenders’ mandated cash reserve requirement (CRR).

Traders and bankers said they were now lobbying for more modest but still potentially effective measures, including easing a daily requirement that currently forces banks to hold at least 95 per cent of the current 4 per cent CRR with the central bank.

That could be brought down to 85-90 per cent, and help spur credit growth. In the latest fiscal year, lending growth slowed to its weakest in almost two decades.

“Transmission of lower rates is severely hampered in a monetary system where banks always start the day short of funds,” said Ananth Narayan, regional head of financial markets, South Asia, Standard Chartered Bank.

“This is not about asking for a back-door rate cut: this is about providing liquidity to the banking system at the current operative interest rate.”

But an outright cut in the headline CRR is not expected at least until June 2016.

The same poll indicated the RBI is likely to cut the repo rate by 25 basis points to 7.25 per cent at its policy meeting on Tuesday, which would mark the third easing this year.

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