For bankers, it’s a divided house on RBI’s rate cut plans

By: | Published: February 2, 2015 8:20 AM

RBI's decision to lower the Repo rate or hold is likely to be a close one at the monetary policy review on Tuesday with most bankers still leaning towards a no-move.

Reserve Bank of India, RBI Repo rate, rbi repo rate cut, RBI monetary policy, rbi monetary policy review, monetary policy review, Union Budget, union budget 2015-16, union budget 2015, lending rate cutsRBI’s decision to lower the Repo rate or hold is likely to be a close one at the monetary policy review on Tuesday with most bankers still leaning towards a no-move. (Reuters)

The Reserve Bank of India’s decision to lower the Repo rate or hold is likely to be a close one at the monetary policy review on Tuesday with most bankers, who are hesitant to pass on the rate cut benefit, still leaning towards a no-move.

While the RBI kick started the rate cutting cycle by the unscheduled move back in mid-January, the next question for the RBI is not ‘if’ but ‘when’ further cuts will be delivered. Domestic banks have been hesitant to lower lending rates despite January’s 25 basis points cut after almost two years, which might prompt the RBI to bunch up cuts to facilitate the transmission process. That’s likely to happen after the Union Budget presentation on February 28.

According to Indranil Sen Gupta, economist, DSP Merrill Lynch, a saving grace is that net interest margins (NIMs) at 3 per per cent plus, are sufficiently high for lending rate cuts. Bankers estimate that 75 bps of deposit rate cuts will neutralise the NIM impact of 50 bps of lending rate cuts. The 70 bps drop in the 10-year benchmark securities in the last three months, should allow banks to cut rates without compromising on the typical risk premium of 400 bps at a time asset quality is under stress.

Radhika Rao, economist, DBS Bank, said, “the likelihood of sub-6 per cent consumer price inflation in FY15-16 and the RBI keen to keep the real policy rate at 150-200 bps, there is room for 50 bps more cuts by June quarter. Accordingly, we look for a 25 bps cut each at the April and June meetings after the Budget, with an inter-meeting move in March not improbable.

Sen Gupta expects 50 bps of lending rate cuts in the April-September 2015 slack season, and 50 bps in FY17. “This should support our forecast of a slow recovery to 6.3 per cent growth in FY16 from 5.5 per cent in FY15. … we expect RBI Governor to cut 25 bps each in April and June 2015 and February and April 2016,” he said.

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