RBI eyes faster transmission; bankers say immediate rate cut difficult

Loans linked to policy repo rate to fall

Notwithstanding the rate cut of 50 basis points through two moves by the central bank since February, bankers are of the view that deposit tightness in the system — resulting in competition among lenders to attract money from customers — will likely prevent them from reducing deposit rates immediately.

 

This comes even as Reserve Bank of India (RBI) Governor Sanjay Malhotra on Wednesday said the central bank aimed at a quick transmission of the rate cut through the banking system.

 

As a result, lending rates, especially the ones linked to the marginal cost of funds-based lending rates (MCLR), are unlikely to come down immediately. However, external benchmark-linked loan rates will see an immediate transmission.

 

“One would like transmission to happen as quickly as possible but it should not be disruptive. So, how we do that is something we will look into and we will take a call,” Malhotra said at the post-monetary policy press conference.

 

The monetary policy committee on Wednesday cut the policy rate by 25 basis points to 6 per cent. It had reduced the rate by a similar magnitude in February too.

 

According to a State Bank of India report, following the cut in February, state-owned banks have reduced deposit rates by 6 basis points, and foreign banks have done so by 15 basis points. Private banks have increased deposit rates by 2 basis points.

 

“Immediate transmission is a bit difficult because rates are high. Plus, competition among banks is there. So cutting deposit rates would not be of any help,” said a senior official at a state-owned bank.

 

Binod Kumar, managing director and chief executive officer, Indian Bank, said: “Loans directly linked to the repo rate will see an immediate impact. But on the liabilities side, even after the last rate cut, deposit rates are still elevated. Therefore, we will not go for an immediate rate cut on deposits.”

 

Experts initially identified liquidity as the primary issue delaying the transmission of rates. Systemic liquidity was in deficit in January, with net injections under the liquidity adjustment facility (LAF) reaching a peak of ₹3.1 trillion on January 23. However, following a series of measures by the RBI, which injected approximately ₹6.9 trillion, the liquidity deficit began to come down during February-March and turned into a surplus by March 29. With government spending also picking up in the latter half of March, systemic liquidity continued to improve, reaching a surplus of ₹1.5 trillion as of April 7.

 

“While existing external benchmark-linked loans will see an immediate transmission (within three months), transmission to new loans will depend on the cost of deposits. Similarly, transmission to MCLR-linked loans may be gradual because it depends on banks’ cost of funds in terms of deposit rates. With credit-deposit rates having come down from their highs, deposit rates are expected to see a downward revision soon. Additionally, deposit tightness, prevalent earlier, seems to be easing now,” said Harsh Dugar, executive director, Federal Bank.

 

Despite surplus liquidity and the RBI assurance that adequate liquidity will be provided, bankers say transmission may not be straightforward owing to structural issues in banking, particularly shifts in the deposit profile. Household savings are increasingly moving away from deposits towards assets such as equities, insurance, and pension funds, which has led to a shift in the banking system’s deposit composition from CASA (current and savings accounts) and retail term deposits to bulk deposits. This change makes it difficult for banks to reduce deposit rates, a key factor in considering cuts in the MCLR.