Rajan went with the majority view to cut repo rate | Business Line

Rajan went with the majority view to cut repo rate | Business Line

My VIEW:

June 24, 2015

Repo rate cut

This
refers to the report “Rajan went with the majority view to cut repo rate” (June
24). As the Technical Advisory Committee has experts from different
backgrounds, it is quite natural that individual members have different
perceptions about growth, inflation and the impact of changes in policy rates
on resources mobilisation and credit flow.

With
the exception of very few economists and analysts, there is near consensus on
the delink between RBI’s base rates and the ground level realities in regard to
deposit and lending rates. Of late,  the
focus is shifting from forcing RBI to ‘cut’ rates again and again, and policy
makers at the highest level have started acknowledging the need to ensure that
the effect of cuts already done reaches the beneficiary down the line, namely
the borrower who deploys the credit availed for productive purposes.

It
has to be clearly understood that base rate cut by RBI does not directly result
in reduced cost of funds for banks. That is why the deposit rates get affected
first and long after, when pressure mounts, depending on market scenario, a
part of the benefit is shared with borrowers by reducing lending rates.
Referring to stagnant interest rates on Savings Bank Deposits which accounts
for a substantial share in banks’ resources, former RBI Deputy Governor S S
Tarapore had recently observed that ‘freezing the savings bank deposit rate at
4 per cent long after deregulation of the rates in 2011 was a clear case of
cartelisation’.

It
is high time, regulator and banks’ clientele took serious note of the unhealthy
practices in fixing deposit and lending rates by banks.

M G Warrier, Mumbai