' Get your retaliation in first ' will work in our politics.

The Reserve Bank has kept the interest rate and the Cash Reserve Ratio unchanged at 7.25% and 4% respectively. Soon after the announcement the Oriental Bank of Commerce cut deposit rates by 25 basis points but did not lower the lending rate. The RBI cut interest rate from 8% to 7.25% this year but banks have refused to pass on the lower rates to customers. To be fair to banks, they raise money from the public in the form of term deposits which lock in the interest they have to pay for months to years. So if a banks average cost of deposits is 8% it has to lend at a higher rate to be profitable. Borrowers get angry because banks raise lending rates as soon interest rate goes up but are tardy in bringing them down. The RBI has forced banks to move away from Benchmark Prime Lending Rates, which is set by banks, to the Base Rate set by the RBI. Banks have transferred home mortgages to their home finance companies which are not bound by RBI rules and continue to use the old BPLR rates, keeping mortgage rates high. Public sector banks are owned by the government, which means politicians, and run by civil servants, which means they are above the law. Shifting to Mumbai Interbank Offer Rate, MIBOR, would make mortgages much more volatile but over the long run borrowers would have to pay much lower rates. It takes 3-4 quarters for lower interest rate to make funds cheaper for banks, at which point banks may start lowering lending rates. The RBI has to wait to see the effect of its monetary easing and also whether the Federal Reserve raises US rates in its September meeting and what effect it has on the rupee. While yields on short term government securities have fallen sharply yields on long term G-secs are still high, at 7.8-7.9%. Yield is inversely proportional to price, so it means that demand for long term bonds is weak. It maybe because foreign investor limit of $30 billion per year is already exhausted or that the market is expecting inflation to rise in the medium term. Whether this means that the market is expecting the economy to grow strongly matters little because if inflation is built into the system any growth will be accompanied by inflation, which will result in monetary tightening and falling growth. There are some encouraging news for the economy. Commodity prices, especially that of oil, are soft, retail inflation at 5.4% is within the RBI target and the RBI has built up foreign currency reserve to cover 10 months of imports. On the other hand, consumer sentiment has fallen to a low level which would translate to lower demand. Rural demand is low, farmers are demanding loan waivers, which will result in increased bad loans in banks, and cement demand is low, showing weak infrastructure spending. If Congress is obstructing play their game. Start corruption cases against some and do not let them breathe until they support the Goods and Services Tax Bill. As they say in rugby," Get your retaliation in first."