By Dr Sudhakar Panda* :

The Reserve Bank of India resorted to unscheduled cuts in the repo rate to the tune of 0.25 per cent twice, once in January 14, 2015 and again on 4th March, 2015 to facilitate increased bank lending to the economy to boost the level of economic activities.

Given the control over inflation and the prevalence of strong fundamentals in the Indian economy the fear of inflation arising out of increased liquidity would not have been justifiable. The decisions and the expectations of the RBI have to be appreciated in this context.

But it would not be the right thing to expect that following a slight reduction in the repo rate, there shall be an immediate and commensurate reduction in the marginal cost of lending by the commercial banks. It takes time for the commercial banks to adjust their operations. One has to appreciate the fact that commercial banks hold the trust of the people and they can never compromise on it.

What would the commercial banks do if (I) they have their prior commitment to their depositors to pay them a particular rate of interest on their deposits which they promised at the time of accepting the deposits,  (II) business people and entrepreneurs are supposed to be cool calculators of the costs and benefits of borrowing in the prevailing business context where they have to work. They prefer to wait and watch.

The Commercial Banks may also prefer to wait before they embark on a policy of ease lending. It takes time for the change factors to be integrated into the economy and get reflected in the behavior of the different agents working in the economy and (III) what would the commercial banks do if they do not experience a surge in the number of borrowers to help them in increasing the volume of their transactions.

Taking a good decision may take time. It is difficult to reverse a decision once it is taken. The RBI Governor took his own time and justifiably so when the question of a cut in the Bank Rate was debated and recommended by trade, commerce and industry.

The Governor has to appreciate the difficulties of the commercial banks in giving immediate effect to the rate cut by the RBI. The commercial banks understand their business and the associated risks better. We need to have a little patience with their policy actions.

*Prof. [Dr] Sudhakar Panda is an economist and was the chairman of the third Odisha State Finance Commission.