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RBI to discuss interest rate pass-through with banks; SBI says no room to cut rates
Photo Credit: Reuters

The Reserve Bank of India (RBI) will talk to lenders later this month about a pass-through on lower policy interest rates, said Governor Shaktikanta Das on Monday.

Concerns over a full pass-through of lower interest rates to the real economy surfaced after Indian lenders lowered lending rates by only 5 basis points after a 25 basis point rate cut by the RBI in early February, raising questions on the efficiency of monetary policy transmission.

"Transmission of rates is very important especially after the central bank announces a rate cut," Das told reporters after its board meeting in the capital.

"We will discuss that issue with the banks and see what needs to be done," said Das, adding that he is set to meet with the heads of private and public sector banks on Feb. 21.

No room to cut rates

Earlier in the day, Rajnish Kumar, Chairman of State Bank of India, the country's largest public sector lender, told news channel CNBC TV18 in an interview that the bank currently does not have any headroom to cut interest rates.

Kumar was responding to a query on why the bank had not cut the marginal cost of funds based lending rates, or the MCLR, and only cut the rate on home loans by 5 basis points despite a 25 basis points cut by the central bank at its monetary policy review earlier in the month.

Indian banks price their benchmark loan rates, known as MCLR, mainly based on the cost of deposits.

"The issue is that we need to cut the rate on the deposit if we need to cut the MCLR," said Kumar, adding this is not possible as other banks are currently offering significantly higher interest rates on deposits and these would need to get slashed first in order for SBI to react.

"The headroom to cut the rates for deposits for State Bank of India does not exist as on date and that is my point," said Kumar. "In the current situation if I cut the rate of interest then I will have a problem."

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