Monetary Transmission: Lenders may not reduce deposit rate
In fact, the 75 bps cut in repo since last year, excluding the 25 bps cut on April 19, has so far resulted into a 30 bps reduction in lending rates and a 25 bps decline in deposit rates. A combination of factors such as credit outpacing deposit growth and elevated government cash balances has tightened liquidity, which has forced banks to chase deposits, raising their funding costs and impacting their ability to cut lending rates.
A research note by Nomura says that the transmission from policy rates to lending/deposit rates has never been one-to-one. “At a time when transmission is partially clogged, this suggests that lending rates are unlikely to fall much,” it says. Aggregate bank credit growth slowed to 16.3% year-on-year as on February 22 from 19.4% as on March 30, 2012, due to sluggish investment demand and raised risk aversion because of the deterioration in public sector banks’ asset quality over the past few quarters.
Similarly, Crisil in a note to client says the 25 bps cut in repo will not immediately translate into a proportionate reduction in lending rates. “Banks are likely to cut lending rates gradually and that too
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