The Reserve Bank of India (RBI) might ask banks to improve monetary transmission by cutting lending rates in response to the reduction in cash reserve ratio (CRR) it had announced in September.
It had cut CRR by 25 basis points to 4.5 per cent of banks Net Demand and Time Liabilities. CRR is the proportion of total deposits a bank has to keep with RBI as cash.
RBI will hold pre-policy review meet with bankers on October 5. Its next policy meeting is scheduled for October 30.
After the cut, India’s largest lender, State Bank of India, was the only one to cut its base rate (BR), by 25 bps to 9.75 per cent. Other banks say they need a repo rate cut (repo is the rate at which RBI lends to banks) to cut their BR. “The emphasis in the pre-policy (the next RBI review of monetary policy is at the end of this month) meeting will be on the way ahead for repo rate cuts. We need cues from RBI on these. The CRR cut doesn’t help much, as it creates only a minor reduction in interest costs,” said A D M Chavali, executive director, Indian Overseas Bank.
RBI has cut the repo rate only once so far this financial year, by 50 bps to eight per cent. After the cut, some banks reduced their BR by 10-25 bps. The Street does expect RBI to cut the repo rate by another 50 bps but the timing is uncertain.
Some bankers say a further cut in BR might be needed if there is excess liquidity in the system. “We need to see a downtrend in the 180-365 days’ deposit rate, which is currently high on RBI maintaining deficit system liquidity and a large supply of treasury bills in 91-364 days’ time buckets. We need to see either a rate cut or shift of system liquidity from deficit to surplus to get banks to cut the base rate. Till then, it would be a wait-and-watch stance,” said J Moses Harding, head of the asset liability committee and economic and market research, IndusInd Bank.
Today’s borrowings by banks under the daily Liquidity Adjustment Facility was Rs 60,460 crore.
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With credit growth sluggish for the first six months of this financial year, a top official of a leading bank recently said RBI’s mandate of a 17 per cent rise in this parameter for 2012-13 might not be achieved.
Economists do expect lending rates to get cut. “We expect lending rates to come off 25-50 bps, atop the 25-75 bps done. Unless lending rates come off, FY13 growth may find it difficult to clock our modest 5.6 per cent, let alone RBI’s 6.5 per cent,” said Indranil Sen Gupta, India economist, Bank of America Merrill Lynch, in a report released on Friday.