There is still room for banks to cut lending rates: RBI Governor Patel
Vegetable prices, which had declined sharply during November 2016 to January 2017, seem to have stabilised but may go up in the coming months due to a seasonal pick up, Patel said.
Following predecessor's path, Urjit Patel, Governor, Reserve Bank of India on Thursday said that there is still room for banks to cut lending rates.
Former RBI Governor Raghuram Rajan throughout his tenure had pushed banks to cut lending rates. Following his footsteps, Patel in its minutes of bi-monthly policy meeting report, said that the demonetisation induced liquidity facilitated faster monetary transmission, hence there is still some room for banks to cut the lending rates.
However, he also said that for efficient transmission, it is important that interest rates on small savings are not out of line with interest rates on other comparable instruments in the financial system.
Moreover, there were research reports which has mentioned that the macro-data released by Central Statistics Office (CSO) on Indian economy has not covered the "real" impact of demonetisation.
Clearing to that, Patel said, "The latest data released by the CSO suggested that the impact of demonetisation on economic activity was modest. Economic activity is expected to pick up in 2017-18, although there is the usual uncertainty about the monsoon at this stage."
Cautioning on upcoming risks, Patel said that the outlook for inflation will face several risks.
As per the release by RBI, Patel said that after reaching a historic low in January 2017, CPI inflation in February 2017 edged up, as expected. However, in all probability, inflation will significantly undershoot the 5% target set for Q4 of 2016-17. Vegetable prices, which had declined sharply during November 2016 to January 2017, seem to have stabilised but may go up in the coming months due to a seasonal pick up.
Input costs have been rising, which could be passed on to output prices as demand strengthens. Further, the implementation of the HRA allowances recommended as part of the 7th Pay Commission and the GST are risks, which could alter the inflation outturn in 2017-18, Patel said.
Uncertainty about the crude oil price trajectory is both ways given recent movements. Heightened geopolitical risks continue to impart financial volatility in global markets, he added.