With fears of unseasonal rains impacting food prices, Reserve Bank of India (RBI) on Tuesday kept the key policy rate unchanged, but nudged banks to lower lending rates while rejecting as 'nonsense' their contention that cost of funds remains high.
later in the day, SBI and HDFC hiked their lending rates by 0.15 per cent.
RBI is assessing the impact of unseasonal rains and hailstorms on food prices even though it hoped that normal monsoon in the coming months would bring down retail inflation to about 4 per cent by August. "Consumer Price Index-based inflation is projected at its current levels in the first quarter of 2015-16, moderating thereafter to around 4 per cent by August but firming up to reach 5.8 per cent by the end of the year," the central bank said in its first bi-monthly monetary policy statement.
Promising an 'accommodative monetary policy', RBI Governor Raghuram Rajan, however, indicated rate cuts going forward depending on favourable macro economic data, and whether banks pass on the benefits of two rate cuts so far this year.
The repo rate, at which the RBI lends to the banking system, will continue to be at 7.5 per cent and the cash reserve ratio, which is the amount of deposits parked with the central bank, will remain at 4 per cent. Bank rate has also been retained at 8.5 per cent.
"We are not looking for a specific number (on the bank rate cuts) and saying unless this happens, nothing more will happen. But we want to facilitate the process of transmission. I do not see an environment where credit growth is tepid, banks are sitting on money and their marginal cost of funding (has) fallen, the notion that it hasn't fallen is nonsense, it has fallen," Rajan said after unveiling the first bi-monthly monetary policy for financial year 2015-16.
On the other hand, industry expressed unhappiness over the status quo on rates, while Rajan said market dynamics will force banks to lower their interest rates. "Comfortable liquidity conditions should enable banks to transmit the recent reductions in the policy rate into their lending rates, thereby improving financing conditions for the productive sectors of the economy," he said.
RBI surprised the markets with two rate cuts of 0.25 per cent each outside the scheduled review meetings this year, but banks have yet to respond to these policy rate cut by lowering their lending rates.