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RBI Governor demands interest rate cuts from banks

After cutting the policy interest rates by 0.25% twice in last few months, taking the total rate reduction to 0.5%, RBI Governor Dr. Raghuram Rajan decided to keep the rates unchanged in its First Bi-monthly Monetary Policy Review for the FY 2015-16 announced yesterday.

Unfortunately, banks have not passed on these rate reductions to us, the helpless and hapless customers. This despite repeated observations by RBI and the Ministry of Finance.

So, one of the key announcements was with regards to making the monetary policy transmission more effective.

RBI wants to make sure that any change in policy rates... more particularly the interest rate reduction... is transmitted to the end users in a timely manner. As you know, banks are very prompt in raising their lending rates whenever RBI hikes the policy interest rates; but not so in reducing them.

Clearly, banks want to make profit at our expense. Unable to recover money lent to many corporates, they are not willing to forgo the improved higher margins that they now enjoy on the retail loans.

Accordingly, RBI has suggested a change in the methodology of calculation of the Base Rates set by banks individually, based on their cost of funds. RBI will soon be issuing detailed guidelines to the banks in this regard. Hopefully, this will lead to a drop in our existing home loan interest rates, besides lowering the rates for new vehicle loans, personal loans, etc.

That apart, RBI Governor made following observations on the global and local Indian economy.

- Stronger recovery in the advanced economies and low oil prices is likely to spur global growth in 2015 and 2016. On the downside, there are risks of slowdown in China, geopolitical risks in the Middle East and the volatility in the currency / commodity prices.

- In the global financial markets, investors have been pushed towards equity and low-rated debt instruments on account of ultra low interest rates. With dollar strengthening, most currencies have experienced large and volatile movements in the exchange rates. With high portfolio inflows to the Emerging Economies, risks from sudden shifts in market sentiment have increased.

- In India, with growth in production showing a positive trend for three consecutive months till January, the manufacturing sector seems to be regaining momentum. Economic activity in the domestic market is likely to have strengthened in the 4th quarter of FY 2014-15.

- RBI would work towards ensuring a gradual and durable reduction in the inflation, with CPI inflation targeted at 6 per cent by January 2016 and at 4 per cent by the end of 2017-18.

- The upside risks to the projected inflation include poor monsoon; unseasonal rains causing significant deviations in vegetable and fruit prices from their normal seasonal patterns; more than expected change in the administered price; hardening of global commodity prices; and effect of external developments such as exchange rate and asset prices.

- "Assuming a normal monsoon, continuation of the cyclical upturn in a supportive policy environment, and no major structural change or supply shocks, output growth for 2015-16 is projected at 7.8 per cent, higher by 30 bps from 7.5 per cent in 2014-15, but with a downward bias."

Concluding, one can say there are good chances that achhe din aane waale hain.

Note: Late evening yesterday the banks finally relented under the pressure and announced rate cuts. Three of the largest banks in India viz. SBI, ICICI and HDFC were at the forefront reducing rates by 0.15% to 0.25%. Of course, the cut is not significant. But still, as couple of cliches go... 'Better late than Never' and 'Something is better than Nothing'. 

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