Banks may not cut rate as RBI tightens liquidity through CRR

Faced with a spurt in deposits following demonetisation, banks are unlikely to lower interest rates as the Reserve Bank soaked up additional liquidity in one stroke by imposing 100 per cent incremental cash reserve ratio (CRR).
"Forget the rate cut, banks are struggling to find resources for making interest payment of 4 per cent on savings accounts which have got deposits of now defunct Rs 500/1,000 notes," a senior banker said.
According to a top finance ministry official, interest rate cannot be allowed to fall below a level that would lead to flight of capital.
"You cannot bring down your interest rate too low that it leads to flight of capital to the US... Interest rate is a balancing act. You cannot bring it too low or raise it too high," the official said.

As it is, there is pressure on the rupee due to various factors, including an expected rate hike by the US Fed in coming days.
One thing to be noted is bond yields and G-Sec rates in India were going down when almost in all other emerging markets the bond yields were going up in line with the US treasury bills and US bond rates, Economic Affairs Secretary Shaktikanta Das said yesterday.

"It is merely happening because of excessive liquidity that we have in the system. When the bond yields go down, naturally there is tendency on the part of people to take the money out into high-yielding areas, specially United States which offers higher yields," he had said.

The government is considering a proposal to raise Market Stabilisation Scheme (MSS) ceiling beyond the existing Rs 30,000 crore to mop up extra liquidity from the system in view of demonetisation.
Banks have already got deposits of Rs 8.11 lakh crore as on November 27.
Meanwhile, some banks like SBI, ICICI Bank and HDFC Bank have already reduced their deposit rates that the market felt is a precursor to a cut in the lending rate as well.
Earlier, Prime Minister had said: "Over Rs 5 lakh crore deposited with banks are not going to be kept idle. Banks will have to extend loans for all sorts of economic enterprise... for which they will have to bring down their interest rates."

According to rating agency Icra, the expected low cost benefit got negated because of RBI's decision of imposing 100 per cent CRR on the incremental net demand and time liabilities (NDTL) between September 16 and November 11, 2016.
"Surge in deposits was expected to result in decline in cost of bank funds. However, due to the above action, the benefits of additional low-cost deposits are negated for banks. Consequently, banks may take a pause on monetary transmission as they await further directions from the regulator," it said.
Days after Prime Minister Narendra Modi signalled that
rates are on the way down, SBI slashed bulk deposit rates by up to 1.9 per cent taking advantage of the surge in deposits following demonetisation.

The immediate impact of the RBI step is seen to cause liquidity to tighten and send bond yields higher with ripple effect on interest rate transmission.
"Banks could delay cutting their lending rates, given that they have promised at least 3-4 per cent interest rate to savings account depositors, but will be not be receiving any interest on the deposits impounded for CRR," Crisil noted.
Even Finance Minister Arun Jaitley had said banks will cut interest rates due to demonetisation and people will get more money.
"Demonetisation will have a huge impact; banks will cut lending rates, people will get more money in their hands. We want a good taxation system in the country where people pay tax honestly," he said.