Scope to reduce bank lending rates: RBI chief (Lead)

May 14th, 2009 - 1:14 am ICT by IANS  

Lehman Brothers Bangalore, May 13 (IANS) There is scope for banks to reduce lending rates in the current economic scenario, Reserve Bank of India (RBI) Governor D. Subbarao said here late Wednesday.
“Given the current economic context and the policy initiatives of the RBI, there is considerable scope for banks to reduce the lending rates,” Subbarao said at an interactive session organised by the Karnataka chapter of the Confederation of Indian Industry (CII).

Clarifying that the monetary transmission was working well in India, he said banks had responded by cutting their lending rates from 50 basis points to 250 basis points.

“Banks have also said as much as 75 percent of their lending was below the BPLR (benchmark prime lending rate). It is not correct to evaluate their lending rates by just looking at their BPLR but (one) must look at their effective lending, which has come down significantly from 2007-08 to 2008-09 to 2009-10,” Subbarao noted.

“Unlike in other countries where monetary transmission has broken as they are at the centre of the financial crisis, it is working in India though weaker than it was before because of the impact of the crisis,” the central bank chief added.

Monetary transmission deals with the policy-induced changes in the nominal money stock or the short-term nominal interest rate on real variations such as aggregate output and employment.

The governor also said it was incorrect to compare how much rate reduction was done by just looking at the reverse repo rate (the rate at which RBI borrows money from banks), which was reduced to 3.5 percent currently from six percent in September 2008.

“We must look at the effective rate in September 2008, which was actually the repo rate (the rate at which banks borrow money from RBI), which was nine percent. The effective rate today is the reverse repo rate, which is 3.25 percent. We have done an adjustment of 575 points,” he asserted.

Evaluating the central bank’s response to the crisis, Subbarao said even as the origins of the crisis around the world were common, it had evolved differently in different countries and the response was likewise in terms of content, sequencing and timing.

In advanced countries, the transmission of the adverse feedback loops had been from the financial sector to the real sector while in emerging economies like India, the transmission of the crisis or the adverse feedback loops have been from the real sector to the financial sector.

“There was nothing wrong with our financial sector. Our real sector was hit, which had in turn transmitted some weaknesses to the financial sector. Our response to the crisis had been consistent,” the governor pointed out.

Responding to the criticism that the central bank was behind the curve and reactive rather than being proactive, doubtful rather than aggressive and bold, Subbarao said ever since the Lehman Brothers collapsed in September 2008, nobody, no country in the world had any idea of the evolution of the crisis, its depth and what implications it would have in different parts of the world.

“So, inevitably, the crisis response had to be calibrated, sequenced and timed. People have done evaluation of central banks’ responses the world over. Those studies have shown that the RBI’s policy response has been measured and adequate…,” Subbarao added.

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