India Inc wants banks to fully pass on previous rate cuts

RBI Governor Raghuram Rajan expressed anguish at the banks' reluctance to pass on benefits of the earlier rate cuts.

With RBI Governor Raghuram Rajan keeping the repo rate unchanged on Tuesday, India Inc on Tuesday  called upon banks to fully transmit the rate cuts effected so far this year to revive weak rural demand and investments.

Rajan left the key policy rate steady at 6.75 per cent at the Reserve Bank's fifth bi-monthly policy review of 2015-16 on Tuesday. The repo is the benchmark lending rate at which RBI lends to commercial banks.

Rajan also expressed anguish at the banks' reluctance to pass on benefits of the earlier rate cuts, saying the median decrease in base rate has only been 0.60 per cent as against RBI's 1.25 per cent reduction in the repo rate since January.

"We would like banks to pass on full benefits in the form of lower lending rates for both consumers and investors. This is important for revving up overall demand in the economy, which is still far from being robust," A Didar Singh, secretary general, Ficci said.

"Of particular concern is demand in rural areas that has weakened on account of deficient monsoons."

The status quo was widely expected as retail inflation rose to a four-month high of 5 per cent in October and emerging markets like India brace for capital outflows on account of a possible US Fed rate hike later this month.

"The focus has now shifted to transmission of lower policy rates to lending rates. Banks need to be ready to finance pick-up in credit growth and RBI should ensure high level of non-performing assets do not constrain banks from financing higher growth," CII DG Chandrajit Banerjee said.

The cash reserve ratio (CRR), or the amount of deposits banks park with RBI, has also been unchanged at 4 per cent.      

Assocham President Sunil Kanoria said the ball is now in the court of the government to see to it that inflation is kept low through better food management.

He also nudged banks to transmit the lower lending rate to borrowers.

The Reserve Bank noted that early signs of a turnaround are visible in some export sectors such as ready-made garments, pharmaceuticals and electronics despite persistent weakness in global trade.

"At a time when key markets of the US, Europe and emerging economies are showing consumer resistance, some out-of-the-box solutions are needed to help exports, particularly in engineering goods, which are produced pre-dominantly by SMEs and are highly labour intensive," engineering exporters' body EEPC India T S Bhasin said.

India's exports remained in the negative territory for the 11th month in a row by registering a decline of 17.53 per cent in October to $21.35 billion.

Exports contracted due to a steep decline in shipments of petroleum products (57 per cent), iron ore (85.5 per cent), engineering (11.65 per cent) and gems and jewellery (12.84 per cent) amid a global demand slump.