The RBI also expects the government, both at the Centre and state, to do its bit by controlling its finances so that rates come down. The case for rate-cut is additionally strengthened by easing of food inflation to (minus) 2.12 per cent from 0.31 per cent. But Patel said on Wednesday that the central bank will continue to retain its "neutral" stance on monetary policy, considering that inflation is set to pick up again in the coming months. This is contrary to the June policy review when some members of the MPC expected the output gap to narrow gradually.
Patel said banks have been selective in their rate cuts in aggressive segments like home and auto loans, but there are many other segments, especially those, where borrowers are still tied to the base rate, where they can do more. This cut down on central bank money lending rate is 6 per cent from 6.25 per cent.
Reports show that, State Bank of India (SBI), the country's largest bank, on Monday cut its savings bank deposit rate to lowest in six years. "Currently the overall demand for loans is at the lowest". RBI has acknowledged the low capacity utilization in the industrial sector, actual CPI inflation undershooting its baseline forecast. The roll-out of the Goods and Services Tax has been smooth and the monsoon normal.
The MPC has stuck to its objective of achieving the medium-term target for retail inflation of 4% within a band of +/- 2%, while supporting growth.
"A rate cut will give a push to credit growth, which has been sluggish from last many quarters", said R P Marathe, managing director, Bank of Maharashtra.Since January 2015, policy rates are already lowered by 175 bps, but the transmission has been less than desired. The RBI had previously cut key rates in October 2016.
The sole dissenting external member and IIM-Ahmedabad faculty Ravindra Dholakia voted for a minimum 50 bps cut in the repo rate. The policy seeks to clarify RBI's line of thought and refocus on core issues such as management of inflation, liquidity management and economic revival.
However, industry experts said the move is not likely to immediately result in lower lending rates for final consumers as some of the banks are borrowing less under the repo window due to surplus liquidity.
"I think we are just slightly outside of the range of 1.75 percent and we are comfortable with that", Acharya said.