The Reserve Bank of India (RBI) held interest rates steady on Tuesday, while boosting banks’ liquidity in a bid to persuade them to lower lending rates after they failed to pass on the benefits of the last official rate cut three weeks ago.
The RBI kept its policy repo rate unchanged at 7.75 per cent, as expected by analysts, leaving its next reduction probably until after the government presents its annual Budget at the end of this month.
“Given that there have been no substantial new developments on the disinflationary process or on the fiscal outlook since January 15, it is appropriate for the Reserve Bank to await them and maintain the current interest stance,” the central bank said in a statement.
Instead, to prod banks to lend more and lower their lending rates, the RBI cut the statutory liquidity ratio (SLR) – the minimum portion of net deposits that banks must hold in government bonds, cash or gold – by 50 basis points to 21.5 per cent from Feb. 7.
Only three of India’s 45 commercial banks cut base lending rates in the wake of the RBI’s reduction in the repo rate by 25 basis points on January 15, hurting the government’s drive to lift business investment.
Bank profits have been poor, but RBI Governor Raghuram Rajan said that given the weak credit growth, banks would have to start lending again at some point.
“To get that lending they will have to be more competitive, which means they will have to cut base rate. I am hopeful it is a matter of time before banks judge that they should pass it on,” Rajan told a news conference.
“Many have been relatively quick to cut their deposit rates, but not so quick to cut their lending rates, I presume some are hoping they can get the spread for a little more time to repair banks’ balance sheets.”
While RBI officials suspect banks are trying to protect profit margins, commercial bankers complain that liquidity conditions have been too tight for them to lower lending rates.