With other fund-raising alternatives for companies like the commercial papers (CPs) and certificate of deposits (CDs) reflecting the RBI's rate cuts -- it has cut the repo rate by a cumulative 0.75 per cent this year, Rajan said banks will eventually be forced to act to hold on to market share.
The Central Bbank wants the lending rates to be determined by the market, which will be primarily depend on marginal cost of funds, he said. Currently, banks fix lending rates based on the average cost of funds which is pegged to deposit costs.

Rajan said RBI is awaiting feedback from bankers on a proposed revision in framework on base rate computation, under which it plans to shift to the marginal cost of funds system.
The move, announced in the first bi-monthly policy statement on April 7 and which was frowned upon by bankers, is a stop-gap arrangement and RBI would ideally want the system to migrate to a market-determined benchmark rate of lending in the medium term, the Governor said.
Base rate is the minimum rate of lending for banks and was adopted in July 2010 to make the rates more transparent.
After Rajan's hard talk in April, where he termed the bank's insistence for holding on to high rates as "nonsensical", banks have cut their lending rates between 10 and 25 bps.
The RBI Governor today cut the repo rate at which the central bank lends to the system by 0.25 per cent to 7.25 per cent, to boost the sagging investments. Ideally, it wants a smoother transmission of these actions in the real market.

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