Jaitley nudges banks to pass on rate cut benefit to borrowers

Finance Minister Arun Jaitley today welcomed Reserve Bank's cutting the key interest rate by 0.5 per cent, nudging banks to transmit the benefit to borrowers so as to boost investments and the economy.

The rate cut, he said, will reduce the cost of funds and help economic recovery.

"This decision of the RBI will significantly provide policy support to the real economy and help in the recovery process. We are looking forward now to the transmission of these cuts which will effectively help to boost confidence and investment. They will also help to realise the economy's medium term potential growth rate," Jaitley told reporters.

RBI in its fourth bi-monthly monetary policy for the current fiscal reduced the lending rate by 0.5 per cent with a view to boosting growth.

It has cut the benchmark lending rate by a total of 1.25 per cent since January.

As regards the price situation, Jaitley said: "There will be a need to have a constant vigilance now on the inflation front.

"This decision of the RBI actually implies that inflation pressure has moderated significantly and is now within the comfort zone."

The government, he stressed, was fully committed to meeting the fiscal deficit target in order to consolidate the gains achieved by the contained inflation.

On RBI's decision to relax portfolio investment norms, Jaitley said, it will allow Indian corporates "to raise external commercial borrowings through rupee denominated offshore bonds with no end use restrictions. This would enable them with an additional source of resources."

To make the FPI investment regime more predictable, RBI has decided to fix the caps in rupee terms and raised the investment limits in central government securities to 5 per cent of the outstanding stock by March 2018, up from 3.8 per cent currently.

The increase in limits, Economic Affairs Secretary Shaktikanta Das said, will result in additional inflow of investments in G-secs by about Rs 1.2 lakh crore (Rs 1.2 trillion) from the existing limit of Rs 1.53 lakh crore (Rs 1.53 trillion).

In the current fiscal, he added, an additional Rs 26,000 crore (Rs 260 billion) will flow into the government securities market.

Chief Economic Adviser Arvind Subramanian said the government would review the GDP growth target for the current financial year after the figures of second quarter are known.

RBI has lowered the growth forecast from 7.6 per cent to 7.4 per cent for the current fiscal.

The Finance Ministry had earlier pegged the growth rate for 2015-16 at around 8.1-8.5 per cent which looks difficult as the growth in the first quarter worked out to be only 7 per cent.

He also said that the government would be reviewing the framework for small savings scheme.

"The government looks forward to the transmission of these cuts to the rest of the economy and will work to facilitate this transmission, including by reviewing the framework of small savings," he added.

Jaitley too has said the government will review the interest rate on small savings, hinting that they could come down in tandem with the overall reduction in the interest rates.

Image: Finance Minister Arun Jaitley speaks. Photograph: Amit Dave/Files/Reuters