Banks will not cut rates if central bank maintains status quo

Borrowers might have to wait a little longer for lower rates from banks, if the Reserve Bank of India (RBI) does not cut rates in its policy review on June 17. This is because banks are unlikely to cut rates if RBI maintains status quo in the wake of a worsening rupee and stubborn retail inflation.

"If RBI doesn't change its stance, obviously there won't be any transmission," said Shubhalakshmi Panse, chairperson and managing director, Allahabad Bank.

Although RBI has reduced its policy rate by 75 basis points (bps) since the beginning of 2013, banks haven't passed

the benefits to customers in line with the cuts. For instance, State Bank of India, the country's largest lender, last cut its base rate by a mere five bps on January 30 to 9.70 per cent, following RBI's 25 bps cut each in repo and cash reserve ratio (CRR).

RBI further reduced repo rate by 50 bps in two subsequent policies and left CRR untouched at four per cent. However, SBI did not pass on this rate cut to its customers.

According to SBI chairman Pratip Chaudhuri, it's the CRR cut - rather than a cut in repo rate - that helps banks to pass on the rate cuts. Other bankers also echoed this view, citing high deposit rates as a restraining factor for them to reduce rates. "Deposit rates are not coming down because deposit growth is not in tandem with credit growth," said Panse. According to S K Jain, executive director of Union Bank of India, so long as interest on deposit don't come down, the lending rates will not subside. Last week, SBI had announced a 25 bps cut in interest rates on bulk deposits. It, however, left the rates on retail deposits untouched. However, if the central bank decides to reduce repo rate or CRR, then banks could pass on the benefit of lower rates to borrowers.

"It would depend on the quantum of the rate cut," said Panse.

Some bankers, however, said rate cut in selective brackets may be possible even if RBI maintains status quo.

"Some deposit rates have started to come down and at the same time, lending rates may begin to fall in some selective brackets," said Ranjan Dhawan, executive director, Bank of Baroda. He pointed out the bank recently cut home loan rates above Rs 30 lakh and now offers all home loans at base rate.