With the latest rate cut of a quarter per cent and other measures, including a reduction in the daily cash reserve ratio requirement from 95 per cent to 90 per cent, the RBI has cut a total of 1.25 per cent since 2015. Banks are now literally ring-fenced and have to cut lending rates. They have so far passed on to consumers barely 60-70 per cent of the successive rate cuts on the excuse that they do not have enough liquidity. Earlier they had complained against the unfair competition they faced from small savings instruments and the government, with the support of the RBI, cut these despite protests from the people. RBI governor Raghuram Rajan showed the seriousness of his intention to see that the rate cuts are transmitted to corporates, and to those who take home, auto and personal loans, etc., by focusing the first bi-monthly policy statement of 2016-17 on creating liquidity “to strengthen activity and aid government initiatives in reviving economic activity”. He owed these measures to the government for creating an environment so that the RBI had room to bring down rates. In fact, he lauded the government for effective supply-side measures keeping in check food prices and for “commendable commitment to fiscal consolidation”.
It is puzzling why everyone is dissatisfied with the policy because they were expecting a half per cent rate cut. In short, they wanted more liquidity in the system. The RBI has provided ample liquidity. The governor has exquisitely explained the “substantial refinements in liquidity management framework” when he said the quarter per cent cut is not insignificant and must seen with a slew of other measures he has taken. For instance, the latest announcement of the marginal cost of funds-based lending rate (MCFR) has brought down the lending rate by 50 basis points, or half a per cent. Since January this year the RBI has pumped in over Rs 2.82 lakh crore through daily liquidity injections, open market operations and buyback operations. In view of all these measures to pump prime liquidity, it is indeed disconcerting, and that India Inc. and analysts should insist on seeing a 50 basis point cut. One wonders why the media, corporates and analysts don’t campaign for banks to pass on the previous RBI rate cuts, and the present one, instead of, as Dr Rajan said, being obsessed with 25 and 50 basis point cuts.
The RBI has been very conservative in retaining GDP growth at 7.6 per cent when most rating agencies and other are talking of 7.9 per cent, if not more. Perhaps it finds it better to err on the side of caution, even though it acknowledges that the government has taken several measures to kick-start growth and the governor himself has announced with missionary zeal that he will push banks to transmit the rate cuts.
