The wait for interest rate cuts will get longer after the central bank opted for status quo in its mid-quarter review of monetary policy.
Banks said there was little room to ease rates as the Reserve Bank of India (RBI) kept the key policy rate and banks’ cash reserve ratio (CRR) unchanged. Hoping for a further cut in the repo rate (at which RBI lends to banks) and CRR to infuse liquidity, banks had hinted at a downward revision in interest rates.
B A Prabhakar, chairman and managing director (CMD) at Andhra Bank, said, “Inflation seems to be the major concern for RBI. I do not see any rate cut unless inflation stabilises at RBI comfort levels.”
Indian Overseas Bank CMD, M Narendra, said for now, the interest rate scenario may not undergo any change. The additional export refinance facility mighty help ease liquidity pressure if the mismatch on low deposit growth and demand for credit continues.
Expectation was building that commercial banks would follow State Bank of India’s lead in reducing lending rates. Last week, the country’s largest lender had cut loan rates by 50-350 basis points to farmers and small and medium enterprises, and on corporate loans, to pass on the benefit of a 125-bps reduction in CRR.
A senior SBI official said, “There is no change in RBI stance; we cannot cut the lending rates further at the cost of profitability. At present, the interest rate decision is not a function of RBI policy rate action but of market liquidity.”
Besides, pressure on liquidity and the uptick in credit growth seen in recent weeks is also perhaps giving room to bankers to hold on to present rates. Jayarama Bhatt, managing director with Karnataka Bank, said growth in these two months had been good even at present rates. The first priority was to build a low-cost deposit base — current accounts and savings deposits — to increase spread. Rates could be reviewed later.
Ruling out an across-the-board change in interest rates, IDBI Bank’s chief financial officer, P Sitaram, said there might be a possibility of reduction in some products or categories, as banks had not yet passed on the entire 50 bps cut in the last policy. Overall lending rates are linked to deposit rates, yields, operating cost and credit spreads, where deposit rates carry the highest weightage. It will vary across banks, he said.
While reducing the cost of funds always tops the agenda, subdued growth in deposits has made some argue for a rise in rates on deposits. Prabhakar said the widening gap between credit and deposit rate growth remained a concern, but deposit rates needed to go up to improve the deposit growth.
S L Bansal, CMD of Oriental Bank of Commerce, said, “I don’t see deposit rates coming down at least till June-end, as banks will continue to offer attractive rates to meet the quarterly targets. Till then, it will be difficult to cut lending rates.”