The policy rate has been cut by 50 basis points (bps), which is more than the market expectation of 25 basis points. Historically, banks were quick in hiking rates whenever the RBI increased rates and were tardy in reducing rates when the RBI cut the indicative rates. How will banks respond to your strong indicative rate cut?
Subbarao: We expect that monetary transmission will take place because of the rate reduction on Tuesday, not only because of the single action today but because of the cumulative impact of the Cash Reserve Ratio (CRR) reductions over the last six months plus this rate reduction for a number of reasons. First, liquidity is going to be more comfortable than it was last year. So, the pricing power available to banks will be reduced to that extent and if there is credit demand, they will be forced to reduce lending rates. And the very fact that it is 50 bps as against the traditional baby steps of 25 bps should indicate that transmission will be strong. Also funding costs of banks have come down due to rate reduction. All these factors will make transmission more effective.
Do you think banks reacted positively to the RBI's move to provide liquidity in the financial system by cutting the CRR by 125 basis points in the current calendar year?
Subbarao: To some extent they have reacted but some of that residual is still left. That is some of the banks' chairmen said that the response would not only depend on Tuesday's action but also on the cumulative easing of the RBI's policy.
What will be the impact of today's action for the retail customers?
Subbarao: As a central bank, we do not micro manage. We give a policy rate signal. We increase or reduce CRR and expect banks to response. We are not telling banks that they should behave one way or the other. But it is our expectation that monetary transmission has been effective and will be effective. It may take time but it will translate into lower lending rates.
Earlier in the day before your policy announcement, Pranab Mukherjee made a statement that he expected the RBI to announce an easy monetary policy. Was there any pressure from the government on you to make it a 50 bps cut rather than 25 bps?
Subbarao: There was no pressure. It was our policy based on our judgment.
Inflation is a major concern for the RBI and it is still persisting. Though you set a target of 6.5 per cent for March-end 2013. Will it be too ambitious?
Subbarao: It is our judgement that March, 2013, will be 6.5 per cent. But it will be range-bound as there are risk factors for inflation like crude oil prices, current account deficit and movement of the rupee, adjustment of oil prices, behaviour of the monsoon, protein food inflation …
When it comes to high prices of food items, is there some failure on the part of the government in terms of supply-side management?
Subbarao: I cannot comment on that but that is something that the government has to do and it has indicated that it is acting on that and in budget last year, the Finance Minister has provided money for encouraging cultivation of protein foods and strengthened those measures in the recent budget. So supply side response measures are responsibility of the government.
