RBI is watching monsoon’s impact on inflation: Rajan


  • 21 Aug 2015

Amid persistent rate cut calls from the government and the industry, RBI Governor Raghuram Rajan on Thursday said the central bank is keeping a watch on monsoon and global factors to assess their impact on inflation.

At the same time, Rajan also appeared critical of banks for not passing on entire benefit of RBI's 0.75 per cent rate cut so far in 2015, and said markets are better reflecting the lowering of the central bank's policy rates than the lenders.

However, the government and the industry continue to pitch for further rate cuts, which RBI has linked to trends in inflation and the global factors.


"I am just going to repeat what we said in the monetary policy statement. We will wait for developments on the inflation front, we are waiting for monsoon out-turn, and we are waiting for developments on the external front.

"On all these, since the last monetary policy (on August 4), there has been more information of course, and we will take that into account accordingly," Rajan said here at the SBI Banking and Economics Conclave.

Making a case for rate cut, Finance Minister Arun Jaitley earlier this week had said that RBI will take note of the declining inflation and take a decision accordingly.


"Inflation is under control, and hopefully the impact of inflation being under control is a factor which, I am sure, the central bank with all its wisdom will take note of," Jaitley had said after inaugurating the same Conclave.

Inflation, both retail and wholesale, are at record lows.

While retail inflation stood at 3.78 per cent, WPI came in at (-)4.05 per cent in July.


Rajan said there has been is a pick up in the economy and hoped that the rural economy would also see an uptrend if monsoon improves and the sowing is good.

While RBI has cut its rates thrice so far in 2015, each time by 0.25 per cent, it retained the rates during the last policy meet amid a clamour for further rate cuts.

The central bank, which is scheduled to hold its next rate review meet on September 29, has linked further monetary policy easing to further softening of inflation. Out of the three rate cuts so far in 2015, two have taken place outside the scheduled bi-monthly monetary policy review.


RBI has kept the option open for another rate cut outside the scheduled review if inflation remains subdued and global factors are conducive for lowering of its benchmark rate.

Meanwhile, amid persistent rate cut calls from the government and the industry, Raghuram Rajan said the central bank is keeping a watch on monsoon and global factors to assess their impact on inflation.

Rajan said that the transmission of its rate cuts is taking place in the markets.


"A lot of corporations are moving away to borrow their working capital needs," he said adding that these are mostly big corporations which are highly-rated and not the small ones.

Cautioning the banks against competition from the markets, Rajan said "this is also a warning to the banks that over time the market competition will get stronger and if the market responds more quickly to transmit policy rates and the banks stay behind, this loss of business will continue." 

"The answer in the longer run is to convert the fixed cost deposits into floating rates either through incentives or by swapping and use the interest rate derivative market much more. This is a process which is happening." 

He, however, quickly added that he is "not pessimistic about transmission in the longer run".

"I am not pessimistic about the fact that transmission will get faster over time as all these things develop, but it is a process. First banks will move to marginal cost of funding for base rate and next step will be to tie loans to market rates which FIMMDA will provide," he said.

The lenders, including state-run SBI and private sector giant ICICI Bank, have justified the 0.30 per cent rate cuts at their ends, saying that an equivalent increase of 75 basis points in RBI's rates had also led to a hike of only 0.30 per cent in the rates offered by the banks to their customers.

Speaking at the same time, ICICI Bank's CEO Chanda Kochhar said on transmission of RBI's policy rate cuts into lending rates that there can never be an equal cut at the bank's end.

"A 75 basis points cut translates into 40-45 basis points cut in Cost of Funds for banks. You have already seen a 30 basis points cut. Transmission will never be a one is to one correlation with monetary policy rates," she said.

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