Rajan said banks have typically become used to reasonably slow moving base rate which gives them time to adjust the deposit cost before they adjust lending.
On September 1, the regulator had put out draft guidelines on computation of base rate based on marginal cost of funds methodology. It had asked for comments on the draft.
The central bank on Wednesday said the final guidelines on base rate calculation will be issued by the end of November.
"Our banks will have to move towards that, we cannot continue protesting," Rajan told analysts after the policy announcement.
"We live in a marginal cost world, we don't live in a average cost world because incremental loans are made in response to competition from market which don't have any memory."
He said banks are making loans based on the rates prevailing in the market at current points.
"Given that there are pressures on the banks to respond and you can see those pressures, I would say, in the incremental loans that they are making where interest rates are often more favourable than in the legacy loans that they have in the balance sheets, even though we would say that there should be no discrimination."
Rajan said banks have typically become used to reasonably slow moving base rate which gives them time to adjust the deposit cost before they adjust lending. He, however, said despite the slow moving base rate, banks have been quite fast in the cycle to adjust deposit cost downwards.
"The bottom line is the market pressures and the competitive pressures from fast moving bank like HDFC Bank would force other banks to move towards a more marginal cost based base rate."
Last month, HDFC Bank lowered its base lending rate by 0.35 per cent to 9.35 per cent, the lowest in the industry.
Rajan said banks have some legacy issues and the RBI is examining some of them. "We are looking at some of the bank's concern and we will think about how to respond to those concerns in way that moves the system forward."
The Governor said there is a need to move towards benchmarks that are set by the market rather than by the banks themselves. "This is something that will be the next step of the marginal cost pricing," he added.
Talking about the bank capitalisation to meet the Basel III norms, Rajan said the government has formulated two plans - one is to improve governance structure in banks and other, in which RBI is also engaged in, is cleaning up their balance sheets.
He said with better governance and cleaning up books, banks will be able to raise more capital and at a favourable prices.
"These will allow banks not just to meet the requirements but exceed that as they move on towards further growth.
Rajan said there is a need to do more to make bank boards more professional. "Government clearly has indicated its desire not to intervene, as perhaps was done in the past, to make the banks more independent."
Finance Minister Arun Jaitley had on Tuesday pitched for giving more independence to state-run banks and also said they should be kept away from any political interference.
"Public sector banks in particular have to be given a lot of independence and should be at an arm’s length distance from political decision-making," he had said.
The governor further said there is a need to bring in changes in the organisational structure of banks.
"We have advocated for moving towards holding company structure. If they (banks) go towards that, which eventually they will for variety of reasons including prudential, banks will have the capacity to raise the capital at two levels – at holding company structure level and bank level," Rajan said.
These changes will help in easing some pressure on the government in terms of banks' capitalisation, he said. "But all this is predicated on having greater access to market and having the ability for the government to unload its share."
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