Strong signal for banks to cut rates: RBI governor Subbarao

D. Subbarao, governor of the Reserve Bank of India, on Tuesday said that there is limited scope for further rate cuts.

“(It is) Not as if there is no scope for more rate cuts ... But scope is limited,” he told NDTV Profit at a press conference in Mumbai.

Earlier in the day, the Governor announced a 50 basis point cut in the repo rate, or the rate at which banks borrow money from the central bank.

“(A) 50 bp cut a strong signal for banks to cut rates,” Subbarao said.

(Read: RBI cuts policy rate by a steep 0.50%, first rate cut in 3 years)

He also said that effects of two earlier cuts in cash reserve ratio (CRR) had not yet been passed on. CRR is the percentage of deposits banks are required to keep with the RBI.

“Monetary transmission should be effective,” he said.

The economy is “delicately poised in growth-inflation balance,” he said, adding that gross domestic product (GDP) growth for the financial year ended March 31, 2012, could be lower than 6.9 per cent. Growth is currently below trend, he said.

“If growth inflation dynamics change , policy stance could change,” Subbarao said.

The RBI will continue to strive for 5 percent inflation, he said.

“Inflation comfort zone remains between 4 to 6 percent,” Subbarao said, adding that “There is no new normal for inflation.”

The medium-term intention of the central bank to bring down inflation to 3 percent remains, he said.

He reiterated that adjustment in oil prices would not lead to a surge in inflation.

On the banking system, he said that banks’ concerns over aviation non-performing assets have eased.

However, “Asset quality (is) under pressure and could continue under pressure,” he cautioned, adding that banks are keeping a watch on asset quality