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Rate cycle reversing, but banks may go slow on interest cut

Repo rate is the rate at which RBI lends money to commercial banks in the event of any shortfall of funds and is used by the RBI to control inflation.

Mumbai: It looks like the interest rate cycle is reversing with the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) cutting the policy repo rate by 25 basis points to 6.25 per cent. This is the first rate cut since August 2017.

The MPC also changed its stance from calibrated tightening to neutral and lowered its inflation forecast sharply, thereby opening room for another rate cut in the April policy.

Ideally, Thursday’s measures should mean loan rates for individual borrowers and companies would fall, but that would come only slowly and marginally, as deposit growth for banks has been slower than loan growth.

In addition, saddled with huge bad loans, banks are facing profitability pressures. Much will, however, depend on what the big daddies such as State Bank of India, Punjab National Bank, Bank of Baroda, ICICI Bank and HDFC does as competition would force the rest to follow suit.

But depositors don’t need to worry about rates going down now, as banks in their bid to garner more deposits, are unlikely to cut deposit rates steeply.

After the RBI policy, Bank of Maharashtra cut the marginal cost of funds-based lending rate (MCLR) on six-month loans by 5 basis points to 8.55 per cent per annum, effective Thursday. With this, SME and MSME borrowers will see a marginal reduction in their working capital loans from the bank.

Repo rate is the rate at which RBI lends money to commercial banks in the event of any shortfall of funds and is used by the RBI to control inflation. One basis point is one hundredth of a percentage point.

Das in his press conference said that he expects banks to transmit the rate cut benefit to the borrowers and would be discussing monetary transmission in his meeting with bank chiefs in the next few weeks.

Virat Diwanji, senior executive vice-president and head-branch banking at Kotak Bank said, “The drop in deposit rates will be linked to the asset-liability mismatch of a respective bank. Every bank will try to focus on the tenure bucket where it needs money and hence in that bucket would not drop the rate. Overall, given the liquidity situation, the drop in deposit rates will be lower than the drop in lending rates.”

He added, “The drop in loan rates are more driven by market forces but certainly lending rates will come down with a lowering bias.”

A chairman of a mid-sized public sector bank, “Cut in lending rates will happen only after March.” Text messages sent to top officials of SBI, Bank of India, ICICI Bank remained unanswered.

( Source : Deccan Chronicle. )
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