MUMBAI – Banks will not cut lending rates even if the Reserve Bank of India reduced its policy rate from its current level, which the central bank thinks is set “appropriately” as of now, Governor Raghuram Rajan said today.
“… even if we (RBI) cut rates, we don’t believe banks, which are paying higher deposit rates, will cut their lending rates. The reason is that the depositor, given her high inflationary expectations, will not settle for less than the rates banks are paying her,” Rajan said, adding that inflation was placing a floor on deposit and lending rates.
“Currently, therefore, we do not believe the policy rate is at a level where it can affect demand, one way or the other,” he added.
Rajan argued that the central bank believed that as inflation came down because of the weak economy and strong food production, the policy repo rate would exert greater influence on setting of interest rates by banks. This would then start influencing demand, he said.
Rajan was delivering the inaugural speech at the Fixed Income Money Market and Derivatives Association of India-Primary Dealers Association of India Annual Conference.
After taking over as the central bank’s governor, Rajan has raised the repo rate by 75 basis points to 8.0% even as concerns over India’s economic growth remain, with private investments not showing any signs of improvement.