RBI Governor Urjit Patel told the Monetary Policy Committee (MPC) that there is room for banks to further cut interest rate while sounding a note of caution on inflation front in the coming months. The six-member MPC, headed by Patel, had opted for status quo on the benchmark policy rate (repo rate) on April 6.
"There is still room for banks to cut lending rates. For efficient transmission, it is important that interest rates on small savings are not out of line with interest rates on other comparable instruments in the financial system," Patel said as per the MPC minutes released by the RBI yesterday. The weighted average lending rate of banks has come down only by 0.85-90% as against a 1.75% cut in policy rates since January 2015.
Lower lending rates encourage economic activities, but they also have the potential to fuel inflationary expectations. The RBI's mandate is to contain inflation without hurting economic growth. Referring to the price situation, Patel said, “Notwithstanding likely favourable base-effects in the next few months, the outlook for inflation calls for close vigilance with a view to ensuring that the medium-term inflation trajectory evolves in line with the objective of bringing headline inflation closer to 4.0%".