RBI in captivity
Subject: Letter to BS: Why shouldn't bankers take instructions directly from FinMin?
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M G Warrier
February 21, 2019
Rate cut impact
This refers to the report “Das, bankers may not be on the same page over passing rate cuts” (February 21). Let us face realities. Time was, when interest rates were ‘regulated’, but banks respected and listened to RBI’s sermons. Today, rates are deregulated and bankers know that RBI is in captivity and is parroting GOI’s wishes without applying its own institutional mind. In such a situation why bankers should not take instructions direct from finance ministry or still better, from the political leadership, as in any case elections are round the corner?
Coming to the facts and figures, the 25 basis point reduction in Repo Rate works out to just 4 percent reduction in the rate. Banking system is at present availing a negligible percentage of their total resources needs from RBI. This explains the poor impact of changes in base rates on lending/deposit rates. Bluntly put, the use of the phrase ‘passing rate cuts’ is fallacious. The 5 basis points token reduction, that too only for small home loans, by SBI following the rate cut is indicative of this perception.
Forcing banks to reduce both deposit rates and lending rates accepting RBI’s rate cut as a signal can have wide-ranging implications on other crucial variables including credit flow and inflation.
M G Warrier, Mumbai