Days after criticism that Reserve Bank of India’s (RBI) rate cuts are not benefitting customers, the RBI said that a developed and integrated financial markets are pre-requisites for effective and credible transmission of monetary policy impulses. To be more precise, as per the RBI, the transmission of monetary policy works well in the call money rate, as it is impacted immediately with robustness.
By adding further, it said, monetary policy transmission to financial markets in India is asymmetrical - it is faster and persistent when the monetary system is in deficit mode, than when it is in expansionary phase. To boost economy’s growth, the RBI has been reducing its key policy rates and so far it has reduced repo rate by 100 basis points since April 2012. However, the lending rates have not reflected this easing with just about 40 basis points reduction in lending rates by banks.
Bankers mentioned that the low reduction in lending rates was due to deposits which are still costing much given the investors are choosing real assets such as gold and real estate after three years of negative real interest rates, adjusted for inflation.
Indian banking system has been witnessing the lowest growth in deposits in more than a decade. The savings rate has also fallen to 31 percent of the gross domestic product in FY12, from a high of 37% in FY08. Further, liquidity in the banking system is also tight with banks borrowing more than Rs 1 lakh crore from the RBI.
