More Room for Banks to Pass On Rate Cuts: RBI

Mumbai: RBI Governor Raghuram Rajan on Tuesday said there is more room for rate cut by banks as the lenders on an average have only passed less than half of the 1.25 per cent reduction announced during 2015.

"I think if you look at 1-3 year deposits, banks have already cut significantly more than what has been transmitted through the base rate. In that sense, there is room building up for the banks to transmit more. I think it is a matter of time as these costs flow through," Mr Rajan said.

"Thus far, we have seen only half the interest rate cuts since January passed through. We are working with the banks," he said after unveiling fifth bi-monthly monetary policy statement 2015-16 here.

Since the rate reduction cycle that commenced in January, less than half of the cumulative policy repo rate reduction of 125 basis points has been transmitted by banks, he said, adding that the median base lending rate has declined only by 60 basis points.

The Reserve Bank of India in four instalments reduced interest rate by 1.25 per cent to 6.75 per cent. The first rate cut of 0.25 per cent was effected in January, followed by similar rate cut in March. The third rate cut of 0.25 per cent was done in June.

In the last policy review on September 29, the RBI had slashed interest rate by 0.5 per cent.

The benchmark repurchase (repo) rate has subsequently come down from 7.25 per cent to 6.75 per cent, the lowest in four-and-a-half years.

Banks have been saying the high small saving rates are hindering banks from reducing interest rates. If banks reduce rate unilaterally, they will become uncompetitive.

The rate reduction on small savings like PPF and post office deposit is also going to bring down the cost of fund for banks.

"The government is considering small saving rates and tying them more to market interest rates. I think both these actions will help transmission," he added.