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Words of Wisdom : "Try to be a rainbow in someone's cloud." ~ Maya Angelou

RBI drops rates, again. Banks dupe us, again.

As you may be aware, Reserve Bank of India had, in a surprise move announced a 0.25% cut in the policy interest rates in January 2015.

Now, within a matter of less than two months, RBI has effected another surprise cut of 0.25% in the policy interest rates. Accordingly, the repo rate is now 7.50% vis-a-vis 7.75% earlier. All other policy rates too will slide down by 0.25% from their respective levels.

This translates into a total 0.50% drop in the interest rates.

With such a huge cut in the cost of funds for the banks, they too should have ideally slashed their respective deposit and lending rates... immediately.

Unfortunately for the helpless borrowers, hardly any bank made a cut in their lending rates in January. And they seem to be least interested in doing so this time too.

[Must Read : Don't Trust your Bank, Insurance Co. or Mutual Fund...or your Agent]

All kinds of vague statements are being made.
       
- SBI chairperson Arundhati Bhattacharya said "Our bank will take an appropriate call of a cut in base rate by looking at all evolving circumstances."

- Indian Banks' Association chairman TM Bhasin said "Since there is lag effect for the monetary policy transmission to take place, effect of previous 25 bps cut together with the present rate cut would encourage banks to review their base rates."

- United Bank of India was one bank that had reduced its base rate in January. However, "This time we will observe other banks' actions before reducing our base rate. It may be difficult for us to reduce rate in March” said P Srinivas, managing director and chief executive officer of UBI.

- MD and CEO of ICICI Bank, Chanda Kochar said "The repo rate cut is a welcome step that demonstrates RBI's comfort with inflation outlook."

- Keki Mistry, Vice Chairman & CEO of HDFC said that RBI's rate cut will have a limited impact on the banks' overall balance sheet. "When RBI cuts repo rate, the entire balance sheet of the bank does not get re-priced immediately," he added.

- V R Iyer, chairperson and managing director of Bank of India has indicated that they can reduce their "deposit" rates. But there is no mention of a cut in the "lending" rates.

Only Rakesh Sethi, chairman and managing director of Allahabad Bank has responded positively stating that it would "explore the possibility of a lending rate cut."

All this would have been Ok, had the banks not been extremely prompt and proactive in the past whenever RBI "raised" the interest rates. So this reluctance to reduce rates clearly indicates that banks want to make money at the cost of aam borrowers. Big borrowers anyway don't pay and get all kinds of concessions. 

In fact, even the RBI Governor Dr. Raghuram Rajan has made a repeated mention of this fact. In February he pointed out "However, despite a generalized fall in the cost of funds, banks have yet to pass through these effects, as also the effects of the policy rate cut on January 15, into the spectrum of lending rates." And now he says that "The process of transmission is somewhat asymmetric. Banks tend to be a little faster in raising rates rather than cutting rates." [Remember my advice to Tell your banker to be a waiter?]

Is there a bank cartel? Should the Competition Commission of India step in and take action? Is it time for RBI to go back to the regime of "administered interest rates"? Sooner than later, someone has to ensure that our so-called "modern and competitive banks" don't act like usurious moneylenders often found in our small towns and villages.

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