Banks not cutting rates, but not my job to tell them: Rajan

Moneycontrol Bureau

If the RBI is not at all keen on cutting rates, banks are partly to blame as well. Banks have not cut lending rates even as they have trimming deposit rates due to deposit growth outpacing credit growth. Also, there has been enough liquidity in the system because of structural factors as well as RBI’s market operations.

To a query by CNBC-Awaaz during the media briefing on whether the RBI was prodding banks to cut interest rates, Rajan replied in chaste Hindi:

“Main ne unse yeh nahin kahan ki unko rates cut karne chahiye; main ne sirf yeh kaha ki woh rates nahin cut kar rahe hai (I have not told them to cut rates, I have only said that they are not cutting rates).”

The governor’s diplomatic response prompted laughter from the audience.

“It is not my job to tell the banks what to do. All I am saying that even though rates have come down, they have not passed it on,” he said.

To a previous query, Rajan had said that it was the efforts of the RBI and the government that had helped bring down yields on long term bonds by 60-70 points, reflecting lower inflationary expectations.

“So the transmission process is still not working as ...as...you know.. as significantly therefore....you know...if past fall in short term rates have not been passed through, an additional rate cut is only a mild chance (of rates being passed through). I do believe that there is a signaling effect and I do believe that once banks are confident that rates will come down and stay down, they will start passing it,” he said.

In the past, banks were shy of cutting lending rates, citing tight liquidity as the reason. With liquidity no longer being the constraining factor, RBI would have hoped that banks did their bit to take some pressure off the central bank on the interest rate front.One of the reasons for the slack credit growth is that banks are borrowers are looking to other sources of funding like commercial paper and external commercial borrowing.