Chidambaram urges banks to cut rate, discourage gold buying

Finance Minister P Chidambaram urged banks to pass on the benefits of policy rate cuts to their borrowers. At the same time, he stressed on scarping the fetish for gold investment. Higher imports of gold is fuelling the widening current account deficit.

"Since 2012 the Reserve Bank of India cut repo rate by 125 basis points. However, commercial banks have reduced their rates only by 30 bps. Moreover, banks have a role to play in dampening the enthusiasm for gold. Gold is like another metal, which shines a little more than copper or glass," he said while addressing a conference held by India Banks' Association in Mumbai.

During January 2012 to April 2013, according to India Ratings, the domestic arm of global rating agency - Fitch, the repo rate had been reduced by 100 bps, reverse repo rate by similar margin and cash reserve ratio by 200 bps.

"Public sector banks, median base rate reduction was only 45 bps, while median base rate reduction by private banks was zero. Certainly, some private sector banks reduced their base rate by 25 bps to 40 bps," the India Ratings research report said.

Repo is the rate at which banks borrow money from the central bank while lenders park their surplus funds with RBI through the reverse repo window.

India's banking system stands around Rs 75 lakh crore. Banks have been borrowing in the broader range of 50,000-1,00,000 crore from the repo window. Arithmetically this means, when RBI cuts repo or the policy rate, it is less than 2 percent of bank funds wherein lenders get benefit of RBI rate reduction while, the cost of funds does not change on the remaining 98 percent, bankers arugue.

Gold price

"The drop in gold price globally is a bad news for India. The widening current account deficit remains a matter of concern. Banks too should stop selling gold coins," FM said.

India, the largest importer of gold, imported to 162 tonne in May. This is much more than the monthly average in the record year of 2011.

Inflation

Commenting on Consumer Price Index (CPI) driven inflation, Chidambaram said, it has shown moderation. Expection of good harvest will bring it down further. India's annual consumer price inflation slowed for the second straight month in April to 9.39 percent, government data showed on Monday.

Capital infusion

The government will infuse Rs 14,000 crore in the current financial year into state-owned lenders. The capital support is aimed at maintaining meeting the tier I requirements of those banks under Basel III, a international standard for banks.