Banks dither, Raghuram Rajan acts

The double-quick two-round rate reduction within two months has done very little on the ground for common man. Banks have not come forward to cut lending rates.

BL 3-2-2015 MUMBAI, MAHARASHTRA: Raghuram Govind Rajan, Governor, Reserve Bank of India addressing a press conference on Sixth Bi-Monthly Monetary Policy in Mumbai on Tuesday. Pic by SHASHI ASHIWAL

Since the time he took over as the Governor of the Reserve Bank of India in September, 2013, Raghuram Rajan has consistently drawn flak from across the spectrum for being hawkish in his policy stance.

It took a little over 16 months for him to effect his maiden reduction of 25 basis points in the policy rate. And, he surprised everyone by doing it outside of the policy cycle on January 15. On March 4, he yet again dropped it by another 25 basis points. This time, too, he did not wait for the policy day.

More than the rate reduction per se, what he said to analysts post-cut merits a debate. He hinted that the RBI could revisit the Base Rate determination policy for banks. The provocation for this is very obvious. The double-quick two-round rate reduction within two months has done very little on the ground for common man. Banks have not come forward to cut lending rates.

“The process of transmission is somewhat asymmetric,’’ he said. And, he went on to add, “banks tend to be a little faster in raising rates rather cutting rates.’’

The reluctance of banks to pass the rate cut benefits to borrowers has made the Governor wonder if there were any institutional constraints to do so. Not surprisingly, he has now decided to examine if the changes in Base Rate determination “is working as effectively as they should be.’’ Given this ground situation, is it right to blame Dr. Rajan?

Arguments, often times, veer round to the need for the RBI to distribute its focus on growth as well. And, the Rajan-led RBI has been blamed for the decelerating economy. While the RBI has been getting the stick, banks have not been blamed for not passing the rate cut benefits. Of course, banks have to factor in a different set of dynamics in its lending rate decisions. Why do they play a waiting game? Can’t their internal committees take a call on rate cuts? Are they expecting hints from their political bosses? Often times, one discovers a convenient whipping boy, and deflect the focus to unreal spheres. The situation on the ground requires a quick action. Dithering banks could only accentuate the pains of the economy.