Banks not responding to signals: D Subbarao

Reserve Bank of India governor D Subbarao hinted that banks were not responding to monetary policy signals by refusing to cut lending rates by as much as they should have. Answering corporate queries on why lending rates are not coming down despite rate cuts by RBI, Mr Subbarao said this was on account of weak transmission of monetary policy. “We will do whatever we can for effective transmission of policy rates to lending rates,” he said, without elaborating on the measures that RBI was working on. Since October, RBI has cut by 400 basis points its policy rates like repo rates — the rate at which banks borrow from RBI — and also the cash reserve ratio —the percentage of interest-free deposits that banks have to maintain with RBI. But banks have cut their benchmark lending rates by at best 100 bps. Mr Subbarao said he was optimistic that India’s recovery would be swift and sharp compared with the rest of the world because of the absence of wealth erosion. The central bank’s formal forecast for the economy will be unveiled only later this month when it announces its annual policy statement. Another positive for the economy was low inflation. Mr Subbarao clarified RBI’s monetary policy action was not based only on wholesale price inflation (WPI) numbers, but on consumer prices, GDP deflator and inflation expectations from professionals. The governor sought to assuage the money markets ‘undue alarm’ over the higher-than-usual government borrowing in the current fiscal. He pointed out that the net buyback by RBI, the size of government borrowing, is comparable to what was raised by the Centre in 2008-09. He added the central bank was also concerned about hardening yields and their impact. But he warned against monetising the deficit — printing money rather than borrowing from the market.