Banks see lower lending rates even as RBI stays pat

MUMBAI (Reuters) - India's bankers welcomed the Reserve Bank of India's decision to reverse an order that forced them to surrender all their deposits, saying it would allow them to lower their lending rates even after interest rates were kept unchanged on Wednesday.

Lenders in Asia's third-largest economy have been flush with billions of dollars of liquidity in the past month as people rushed to deposit higher value bank notes that had been rendered worthless by the government last month.

But the RBI, fearing a destabilising impact on debt markets, had ordered banks to place all of those deposits under the central bank's cash reserve ratio (CRR).

The RBI on Wednesday said it would now reverse that CRR hike starting on Dec. 10 after the government had announced it would sell special bonds to absorb any extra liquidity.

Canara Bank , the fifth-biggest state-run lender by assets, lowered its main lending rates by 15 basis points on Wednesday, even after the RBI on Wednesday kept the repo rate unchanged at 6.25 percent, surprising markets that had bet on a 25 basis point rate cut.

State Bank of India Chairman Arundhati Bhattacharya said on Wednesday she welcomed the reversal on the CRR hike, even as she called the RBI decision to keep interest rates unchanged a "disappointment".

"Once this burden is taken away, we'll definitely be seeing some kind of lowering of rates going forward," Bhattacharya said on the CNBC TV18 channel, referring to the CRR withdrawal.

The lender, which accounts for about a fifth of India's banking assets, had kept its lending rates unchanged in its monthly review for December.

The RBI has cut rates by 175 basis points since the start of 2015, but lenders have lowered their lending rates by a little more than 100 basis points, sparking concerns about slow monetary policy transmission.

However, banks have found an unexpected boon in the country's decision to abolish 500 and 1,000 rupees notes, which had been intended to crack down on counterfeiting and the country's "shadow economy".

Chanda Kochhar, chief executive of top private sector lender ICICI Bank, said on Wednesday she also expected lending and deposit rates to continue to fall.

Ahead of the RBI policy decision, Bank of Baroda, the second-biggest state-run lender, lowered its one-year MCLR rate by 20 basis points.

(Reporting by Devidutta Tripathy; editing by Jason Neely)