While banks are yet to pass on the benefits of the earlier policy rate cuts through lower lending rates, the Reserve Bank of India (RBI) is expected to cut the repo rate by at least 25 basis points (bps) on Wednesday on the back of softening inflation in October.
The central bank has reduced its key policy rate by 175 bps since January 2015 and banks have lowered lending rates by up to 110 bps in the same period.
Since April 2016, most leading banks have lowered lending rates in the range of 5-45 bps. For instance, State Bank of India (SBI) has reduced its one-year marginal cost of funds-based lending rate (MCLR) from 9.2% to 8.9% over the same period. Private sector lenders ICICI Bank and HDFC Bank have had a similar cut as well.
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YES Bank lowered its MCLR by a steep 50 bps since April 2016 to 9.1% in an attempt to remain competitive.
Meanwhile, banks have been lowering their deposit rates – bulk and retail – since the last few of months and primarily after being flush with liquidity post demonetisation of R500 and R1,000 notes. SBI recently slashed its bulk deposit rates by up to 190 bps. Following the cut, the 180-210-day deposit attracts an interest rate of 3.85%; for deposits of 1 year to 455 days, the rate stood at 4.25%. Its private sector peer Axis Bank effected a sharp 100-basis-point cut in interest rates on deposits of more than R5 crore with maturities of one, two and three years to 5.5%.
On the retail front, SBI’s one-year term deposits earn 6.9% interest, its lowest in seven years, while ICICI Bank’s one-year deposits attract 7% interest.
RBI governor Urjit Patel had said in October that the transmission to bank borrowers had been less than what anyone would have liked it to be. “And we are hoping that over the next quarter or two, also keeping in mind that the government has also reduced the small savings,” he had said.
Following the surge in deposits, the RBI sucked out Rs 3.24 lakh crore of liquidity by affecting a 100% incremental cash reserve ratio (CRR) between September 16 and November 11 fortnights. It also increased limits to issue up to R6 lakh crore of MSS bonds and has issued R1.4 lakh crore of such bonds till December 6.
Rajnish Kumar, managing director of SBI, was quoted by agencies as saying that 25-50-bps cut is what everybody is expecting and no rate cut will be a bigger surprise.
Meanwhile, analysts said they had factored in a 25-bps cut on the back of moderating food prices even before demonetisation. “That has continued over November and should make it possible for the RBI to get to its 5% target of March 2017 easily,” Pranjul Bhandari, chief India economist at HSBC, wrote in a report.
Nomura expects the cash shortage triggered by demonetisation to last until January and the GDP growth to slow to 6.5% in Q4 and to remain subdued at 7% in Q1 of 2017. “However, in the light of the near-term growth slowdown, we are bringing forward our rate cut call and we now expect the Reserve Bank of India (RBI) to deliver a 25 bps repo rate cut to 6%,” said Sonal Varma, chief India economist at Nomura.