The Reserve Bank of India (RBI) has maintained an accommodative policy stance for well over a year now but its efforts have had a limited impact on spurring bank lending to consumers. Now, economists hope the measures announced on Tuesday will prove different.
Despite slashing interest rates by a total 125 of basis points in 2015, the RBI has been hamstrung by the limited pass-through by banks. Commercial lenders have implemented only about half of the rate cuts, blaming tight liquidity conditions and deteriorating asset quality. Non-performing loans (NPLs), or bad loans, spiked by nearly a third to $60.3 billion late last year, according to Reuters.
On Tuesday, the central bank lowered the rate at which it lends money to banks—called the repo rate—to a more than five-year low and announced new steps to prod banks to pass on the full benefits of monetary stimulus to the wider economy, revealing its commitment to the issue.
Governor Raghuram Rajan cut the marginal standing facility rate, i.e. the amount banks can borrow from the RBI for emergencies, by 75 basis points and said he will ensure liquidity conditions are closer to neutral instead of the previous standard, a 1 percent deficit of net demand and time liabilities (NDTL).
He also introduced a bevy of liquidity-boosting measures to address banks' complaints, including a 5 percentage point reduction of the cash reserve ratio, the minimum amount of deposits that banks are required to park at the RBI.
"These measures will ensure that the easy policy stance percolates to the real economy and materially lowers financing costs," said Radhika Rao, DBS economist in a Wednesday note, echoing similar sentiments by Goldman Sachs.