RBI: bank lending rates to ease gradually

By V. Ramakrishnan and Saikat Chatterjee

MUMBAI (Reuters) - Indian banks were still saddled with high-cost deposits and so lending rates would only soften gradually despite big cuts in official interest rates, Reserve Bank of India (RBI) deputy governor Rakesh Mohan said on Thursday

The RBI cut its key short-term rates by 25 basis points on Tuesday, and reiterated a call for commercial banks to pass on its aggressive rate cuts to help boost the flagging economy.

The RBI has slashed its short-term lending rate, the repo rate, by 425 basis points in six moves since October to 4.75 percent, but the prime lending rates of five major commercial banks have fallen less than 200 points in the same period.

"While interest rates on incremental time deposits are coming down, the average cost of deposits will remain high till the maturing deposits get renewed," Mohan said.

"This, in turn, constrains an immediate substantial reduction in lending rates," he said, at a conference in the London Business School.

Mohan said the reverse repo rate, at which the Reserve Bank of India absorbs surplus cash from the banking system, was the operational policy rate at present.

The rate now stands at 3.25 percent, a historical low, having been cut by 275 basis points in four moves since December.

In India, policy makers have relied on the central bank to prop up activity, as the government's finances have deteriorated rapidly over the past year due to high subsidies, waiver of loans given to farmers and increase in salaries of civil servants and the downturn hitting revenues.