RBI backs FM's call to banks to cut lending rates

Endorsing Finance Minister P Chidambaram's call to banks to pass on the benefit of rate cuts to customers, RBI Governor D Subbarao on Thursday said the central bank is also "very conscious" of the need to be supportive of economic growth.

A day after Chidambaram nudged banks to cut minimum or base lending rate in line with periodic interest rate cuts being made by RBI, Subbarao said lending rates have be to reduced to attract investments.

"When the Reserve Bank calibrates its short term policy interest rate, the expectation is the monetary transmission will takes place and the banks should respond by calibrating the lending rates. Some banks have responded, some have not.

"There are several reasons for monetary transmissions not being agile as it should be. So, in a way, the Reserve Bank is conscious of the need of monetary policy transmission taking place. Because it is important that banks respond by calibrating their lending rates in order to attract investments," he said at a press conference.

On Chidambaram's message to RBI to be supportive of growth when deciding on monetary stance, he said, the central bank is conscious of it and will balance it with inflationary concerns.

"Well, the objectives of monetary policy are price stability, growth and financial stability as we have said several times. And growth also subsumes employment generation. The challenges for monetary policy is to balance between these objectives," Subbarao said.

"We have great regard for what the Finance Minister has said and we have great regard for what the government is saying. And in taking the monetary policy decision every six weeks, we (do) counter balancing of these objectives, he said.

"The short point is we are very conscious of the need to be supportive of growth but supportive of growth in an environment of price stability and financial stability," he said.

Earlier this week, Chidambaram said RBI should not focus solely on containing inflation but also look at the larger mandate of growth and creation of jobs.

"RBI must understand its mandate in a broader sense. Yes, RBI's mandate is price stability, containing inflation and maintaining fiscal stability but that must be understood as part of a larger mandate of growth and creation of jobs," the Finance Minister had said.

To promote growth, RBI reduced short term lending rate or repo rate by 1.25 per cent since 2012. However, commercial banks have reduced their rates only by 30 basis points.

Economic growth rate hit a decade low of 5 per cent in 2012-13 while credit growth also declined to 15.62 per cent as compared to 17.76 per cent in 2011-12.