BofA-ML sees lending rates falling by 50 bps more by March

 Within a couple of days of the country's largest lender SBI announcing an interest cut, Bank of America Merill Lynch (BofA-ML) today said lending rates will come down further by 0.50% before the fiscal end.

"Improvement in bank liquidity should pull down lending rates by 50 basis points by March atop the 25-75 bps done," BofA-ML India economist Indranil Sen Gupta said in a note.

State Bank of India (SBI) cut its minimum rate of lending or the base rate by 0.25 percent on Tuesday, citing the cash reserve ratio cut the previous day by the RBI by a similar quantum and ease in liquidity.

BofA-ML expects the RBI to cut the CRR by a further 0.50% in its third quarter policy review on October 30, the note said, adding, the central bank may also infuse an additional liquidity of Rs 1,00,000 crore by March through open market operations (OMOs).

This is likely to push up the deposit growth to 16% from the present 14%, it said.

However, the softening of rates will not result in an uptick of credit growth as the rates will still continue to be elevated, the note said. "High lending rates will likely continue to soften loan demand to 15% by December from the current 16.7%," it added.

The lending rate cuts are, however, key to economic recovery, Sengupta said, adding growth will pick up in the March quarter to the 6.5% from the current 5% once the lending rates come down by up to 0.50%.

Welcoming the recent reform measures like diesel price increase and foreign holding liberalisation, the BofA-ML note said, though they will help boost sentiment, the real impact of those will be felt in the medium-term.