The Reserve Bank of India on Wednesday said banks' response to monetary actions in terms of cutting interest rates have been mute and there is room for further softening of interest rates.
"We have also told banks that within the policy rate adjustment already done by RBI, there is room for further rate reduction and they had acknowledged to some extent that reality," RBI Governor D Subbarao said addressing TV channels.
Terming banks' response to policy action "muted", he said monetary transmission has been weak. "We would like to be more active, more effective in transmission policy."
Since Lehman Brothers crisis in mid-October, the RBI has reduced short-term lending (repo) rate from 9 per cent to 4.75 per cent now, while it brought down short-term borrowing (reverse repo) rate from 6 per cent to 3.25 per cent at present.
In response to this, banks reduced their benchmark prime lending rate (BPLR) in between 50-200 basis points.
However, the RBI Governor said, "Banks have also told us that their response should not be evaluated just by looking at the headline BPLR rate. We must look at the effective lending rate because as much as 70 per cent of their aggregate lending is done at rates below the BPLR."
