Mumbai: After two cuts in three months, the RBI Tuesday kept the policy rate unchanged disappointing industry and consumers but a virtual war of words broke out with Governor Raghuram Rajan terming as "nonsense" the banks' refusal to pass on benefits on grounds of high cost of funds.
RBI maintained status quo in the first monetary policy review of current fiscal on fears of unseasonal rains impacting food prices.
The repo rate, at which the Reserve Bank of India lends to the banking system, will continue to be at 7.5 percent and the cash reserve ratio, which is the amount of deposits parked with the central bank, will remain at 4 percent. Bank rate has also been retained at 8.5 percent.
Leading bankers, however, maintained that it takes time to lower the lending rates, which they said would happen in two or three months.
"I do not see an environment where credit growth is tepid, banks are sitting on money and their marginal cost of funding (has) fallen, the notion that it hasn't fallen is nonsense, it has fallen," Rajan said.
Promising an "accommodative monetary policy", he indicated rate cuts going forward depending on favourable macro economic data and whether banks pass on the benefits of two rate cuts so far this year.
While industry expressed unhappiness over the status quo on rates, Rajan said the market dynamics will force banks to lower their interest rates, while adding that sooner they cut the rates, better it would be for the economy.
"Comfortable liquidity conditions should enable banks to transmit the recent reductions in the policy rate into their lending rates, thereby improving financing conditions for the productive sectors of the economy," he said.
SBI Chairman Arundhati Bhattacharya said, "You have to understand both ways, it takes a little time for things to pass through. And, it is not only the cost of deposits that determines this.
"The passing through is also determined by the amount of liquidity, the amount of credit demand and competition which also drives rates up or down. There are very many factors and repo is only one of the factors."
Supporting SBI chief, ICICI Bank's Chanda Kochchar said it is not just the repo rate change that determines the base rate change, it depends on cost of funds, deposit mix, liquidity situation and also on credit off take.
However, Bank of India chairperson Vijaylaxmi Iyer said, "The impact of reduction in cost of deposit experienced during the last quarter will encourage banks to pass on the benefit to customers. Retail borrowers may see lower EMIs."
RBI has surprised the markets with two rate cuts of 0.25 percent each outside the scheduled review meetings this year, but banks have yet to respond to these policy rate cut by lowering their lending rates.
After the policy announcement, bankers said that most of them will have their asset liability committee meeting week to take a call on interest rates which besides repo rate depends on factors like demand for credit, cost of fund and deposit rates.
"We would see rates coming down as we see easing of interest rate cycle," SBI's Bhattacharya said.
Commenting on the RBI's action, Chief Economic Advisor Arvind Subramanian said: "It is on the expected lines."
On the reluctance of banks to pass on the benefit of 0.50 percent rate cut announced by the central bank since January, Rajan said, "We are not looking for a specific number (on the bank rate cuts) and saying unless this happens, nothing more will happen. But we want to facilitate the process of transmission."
"Given that there has been very little transmission from rate cut so far... We are waiting to see transmission take place... I have no doubt that this will happen. If it happens sooner it is better for the economy," he told reporters after the announcement of first bi-monthly monetary policy.
"The Reserve Bank will await the transmission by banks of its front-loaded rate reductions... Into their lending rates," the central bank said.
HDFC Bank's chief Aditya Puri said the base rate cut is a function of the deposit cost.
"If the deposit cost goes down, then there will be a base rate cut. If it doesn't there won't be any base rate cut. However we feel between now and June, there should be repricing of cost and that will lead to a lower cost of funds for borrowers," he said.
On the issue of bad loans, bankers lobby IBA chairman and Indian Bank head T M Bhasin said the lenders are optimistic that coming quarters will be better than the past few years, while other bankers refused to specify saying this is the silent period.
