Banks should transmit lower cost of funds to customers, experts say

As the Reserve Bank kept its key lending rate on hold, the industry today said banks should be nudged to transmit lower cost of funds to customers amid increased liquidity in the system. Industry chambers also expect the RBI to change its policy stance going forward and effect a rate cut to refurbish business sentiment and support domestic demand.

The Reserve Bank of India (RBI) left its benchmark lending rate unchanged at 6.25% today for the third policy review in a row citing upside risk to inflation.

It, however, increased the reverse repo rate by 0.25% to 6%, narrowing the policy rate corridor.

CII Director General Chandrajit Banerjee said the status quo on the key lending rate is based on a cautious assessment of the upside risks to inflation while maintaining a positive outlook on growth.

"We are hopeful that going forward the RBI would shift its policy stance from neutral to accommodative and effect a cut in interest rates to refurbish business sentiment, support domestic demand and trigger the turn of the investment cycle," Banerjee said.

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Assocham President Sandeep Jajodia said the focus of the RBI appears to be on liquidity management and anchoring inflationary expectations; thus growth impetus may not be its priority area.

"In any case, with so much of surplus liquidity, the banks should be nudged further to transmit the lower cost of funds to the borrowers. While 25 basis points rise in reverse repo rate should help their bottomline, a clear road map, coupled with strong political will is required to resolve the issue of burgeoning non-performing assets," Jajodia said.

"Given the inflation risks highlighted by the MPC, including the monsoon dynamics, increased allowances related to the pay commission, one-off impact of GST and global reflation risks, as well as the assessed trajectory of CPI inflation, the repo rate appears highly likely to be on hold during 2017," ICRA MD & Group CEO Naresh Takkar. 

Chanda Kochhar, MD and CEO, ICICI Bank, said, "RBI’s clear articulation on liquidity management is welcome and would ensure stability in markets by enforcing the sanctity of the operating rate while addressing temporary liquidity imbalances. Money market rates would be anchored in a tighter band through the narrowing of the LAF corridor. RBI’s continued focus on inflation targeting will reinforce confidence in the Indian economy and continue to support capital inflows.
 
"The focus on resolution of stressed assets will help in renewing confidence and boosting investment and aggregate demand going forward. Along with these, the policy also articulates other important developmental policies, such as expanding the investor base in REITs which would help to expand and deepen domestic financial markets.