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Rajan Expects Banks Cut Rates by April

They tend to be a little faster in raising rates rather than cutting them, quips Guv; hopes the pressure of RBI action will force their hand

Published: 05th March 2015 06:00 AM  |   Last Updated: 05th March 2015 03:48 AM   |  A+A-

Rajan

MUMBAI: Lower interest rates on home, auto or corporate loans could be a reality next month, indicated RBI Governor Raghuram Rajan here on Wednesday.

“My hope is that over the span of the next few weeks, as we move in to the new fiscal, we will see more transmission into lower interest rate,” Rajan told analysts over a concall after cutting the repo rate by 25 basis points (bps) in a surprise inter-meeting monetary policy. With this, the central bank reduced repo by 50 bps in two months. Repo, the rate at which RBI lends money to banks on short-term, now stands at 7.5 per cent.

Banks are yet to pass on the rate revision to customers following the first repo cut on January 15.

Only two State-run banks  - Union Bank of India and United Bank of India - have aligned their base rates with that of others at 10 per cent.

A reduction of interest rate by one per cent or 100 bps leads to savings of `30,000 per annum on a loan of `30 lakh, something that borrowers have been looking forward to. “The process of transmission is somewhat asymmetric. Banks tend to be a little faster in raising rates rather than cutting rates. I have no doubt that the pressure of the two rate cuts over time will feed into lower rates,” Rajan said adding that the RBI was examining if there were any institutional constraints in passing on these interest rate cuts.

“We have made changes to the base rate determination policy and we will be examining this very carefully to understand whether it is working as effectively as it should,” the Governor added.

Meanwhile, reiterating RBI’s stance on the rupee, he said they intervene in the forex market to curb volatility and not to achieve a level for rupee. “I said an excessively strong rupee is undesirable. The fact that it is undesirable doesn’t mean that we will necessarily act against it if that situation were to arise,” Rajan said.

“I believe that what we can do is perhaps act against temporary undesirable volatility. It’s very hard for us to act on a sustained basis to maintain a value of the rupee.”

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