Money markets passing on rate cuts: Reserve Bank of India

Mumbai

SLIDING money-market rates have been hailed by Reserve Bank of India governor Raghuram Rajan as evidence his interest-rate cuts can revive the economy while banks fail to pull their weight.

One-year commercial paper rates dropped 72 basis points in 2015 to 8.30 per cent on Monday, the lowest since 2010. By contrast, State Bank of India, the nation's largest lender, cut its base rate just 30 basis points. The total amount of commercial paper outstanding was 2.71 trillion rupees (S$58 billion) at the end of June, up 30 per cent from December, the latest central bank data show.

"The new development is the markets are transmitting monetary policy much better," Mr Rajan, who has lowered the key repurchase rate three times in 2015, said in an interview with Bloomberg TV in Jackson Hole, Wyoming on Friday. "So a whole lot of firms have gone directly to borrow in the commercial paper market, instead of going via banks. That's a new welcome development." Loans are growing near the slowest pace since 1994 as Indian banks, seeking to shield profits amid surging delinquencies, remain reluctant to pass on lower financing costs. The revival in capital markets alone may not be enough to support Prime Minister Narendra Modi's plans to boost growth. Gross domestic pro…