The prospects of monetary easing this month remain dim. But the liquidity situation indicates banks could pass on the benefits if the Reserve Bank of India (RBI) cuts policy rates.
Since the past fortnight, the daily deficit has reduced to below Rs 60,000 crore, which is in the central bank’s comfort zone of one per cent of net demand and time liabilities. RBI has not conducted open market operations to inject liquidity this month.
Also, banks are shying away from taking bulk deposits at high rates. The rates on certificates of deposit (CDs) have come off by 30-40 basis points against last month’s rates.
“Banks may look at reducing lending rates only if there is reduction in cost of funds. There is no credit pick up at these rates. Hence, business compulsion may also lead to lower interest rates,” said a senior official at a public sector bank.
Sonal Varma, chief economist at Nomura, said, “The liquidity situation, while still in deficit, is better than it was a few months ago. To that extent, policy transmission will be better.”
She had earlier pointed out in a report that in a tight liquidity scenario, RBI will have to deliver more repo rate cuts to ensure the same level of policy transmission.
Banks are yet to effectively pass on the rate cut of 50 basis points announced by RBI in April. Bankers were of the view that reduction in policy rates did not help much, as liquidity was tight and high cost of funds limited their scope for reducing lending rates.
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The central bank is scheduled to announce the first quarter monetary policy review on July 31. RBI had opted to hold rates in the mid-quarter policy review in June, citing upside risks to inflation.
Rohini Malkani, economist, Citi India, said the central bank could surprise the markets with a reduction in policy rates this month if the government increased fuel prices, indicating commitment to address the fiscal situation. Also, RBI could cut the rate to justify the likely revision of annual GDP estimates from 7.3 per cent and draw comfort from a stabilising core inflation and rupee, she said.
However, risks such as poor monsoon, pass-through of rupee depreciation and rising global food prices might make June inflation relief temporary.
“Monetary conditions have eased in recent months as the rupee depreciated, LAF (liquidity adjustment facility) deficit declined, and real interest rates decreased. Hence, there is less need for further accommodating monetary policy measures,” said Taimur Baig, chief economist for India, Indonesia and Singapore at Deutsche Bank.