Corporate and retail borrowers will not see a significant reduction in lending rates in the current financial year owing to tightness in liquidity, higher government borrowings and high cost of deposits, according to rating agency Crisil.
Lending rates are likely to drop by 25-50 basis points (bps) during this period, it said.
"Lending rates are likely to fall by 25-50 bps over the next one year - lower than the 50-75 bps drop expected in repo rate as banks attempt to protect their margins," the agency said in a report today.
According to the rating firm, liquidity in the banking system has remained tight despite reduction in cash reserve ratio (CRR) by 125 bps (1.25%) since January 2012.
Average daily borrowings of banks under liquidity adjustment facility (LAF) were at Rs 1.34 lakh crore for the four months ended March 2012 - almost double the RBI's projected figure of Rs 60,000 crore, it said.
It added that this was due to low deposit mobilisation along with the RBI's intervention in forex market to check volatility in rupee, it said.
The report said tight liquidity situation is likely to continue owing to low deposit mobilisation in the banking system.
"Deposit growth has slowed dramatically to a 7-year low in 2011-12, while credit growth has been relatively stronger. We do not foresee the liquidity conditions easing substantially over the next few months due to the mismatch in deposit and credit growth, and high expected government borrowings," Senior Director (Industry and Customised Research) of Crisil Research, Prasad Koparkar, said.
The report said net market borrowing in FY13 would be around Rs 5.2 lakh crore, and fiscal deficit 5.5% against the budgetary estimate of 5.1%, which will limit the RBI's ability to reduce policy rates.