Despite repo pause, banks likely to cut rates

Reversal of 100% CRR on deposits and steady flow of money into low cost deposits expected to push interest rates down

Despite the repo rate staying steady in the monetary policy review, the interest rates for deposits and loans plus yield on bonds will continue to soften, on huge liquidity in the system.
 
Reversal of the 100 per cent cash reserve ratio (CRR) imposed on deposits garnered after demonetisation and the steady flow of money into low cost deposits is expected to push interest rates down, bankers said.
 
State Bank of India Chairman Arundhati Bhattacharya said the market was a bit disappointed by the decision to keep repo steady at 6.25 per cent. However, ample liquidity in the system would ensure a downward move in interest rates and a softening of yields.
 
Withdrawal of the 100 per cent CRR on deposits from Saturday would take away the additional burden, she said. The move had impounded about Rs 3.5 lakh crore in deposits.
 
Chanda Kochhar, managing director of ICICI Bank, said the incremental CRR withdrawal and use of other instruments such as the Market Stabilisation Scheme to manage liquidity was welcome. Deposit and lending rates should continue to show a downward trend, she said.
 
CRISIL Research said keeping the repo unchanged might transitorily push up the 10-year gilt yield. But, with more liquidity set to enter the system by the December-end demonetisation deadline, yields could soften. Banks are expected to reduce their lending rates towards the end of the March quarter but credit demand would remain insipid, it said.
 
Naresh Takkar, group chief executive at rating agency ICRA, said since the impact of demonetisation was viewed as transitory but was unclear, the door remained open for rate cuts over the next few policies. Withdrawal of the additional CRR would provide banks the scope to still cut lending rates, he added.