RBI has cut rates twice but banks have not reduced lending rates that much,neither they have shown any inclination to do so. The lending rates lowering will be pragmatic only in case banks are having enough liquidity. Liquidity crunch is the result of not lowering CRR accordingly.
Market liquidity has been sucked by dollars being purchased by gold smugglers. Recent upsurge in gold import may be another indication. Govt efforts to curb gold imports or reuse of household gold also may be wasteful exercise because most of this gold is unaccounted.
By controlling SLR, RBI keeps a vigil over credit growth in economy and CRR accordingly controls cash flow in the system. In the absence of credit growth permission, there is no economic justification to reduce lending rate as in absence of enough liquidity, businesses are ready to borrow money at present rates also( though cost of capital may be counter productive to growth). So it would be worthwhile for planners to take a holistic view of the situation...
In future, rate cut should be accompanied by suitable SLR cut also for credit growth...and implicit govt direction to banks to reduce lending rates.....
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