Even though the general feeling is that the commercial banks are now morally bound to reduce their lending rates following the Reserve Bank of India's (RBI) decision to cut its key lending rates, it may not happen soon, say industry experts.
"The banks are now morally bound to reduce their lending rates. Only then other lending organisations -- housing finance, non-banking finance companies (NBFC) -- would be able to cut their rates," a top official of a housing finance company told IANS preferring anonymity.
"The National Housing Bank (NHB), the refinancing agency for housing finance companies, too has raised funds from market borrowing. So unless its own borrowing rates come down, NHB may not be able to pass on the benefit," he added.
However, the bankers are non-committal on cutting their lending rates.
Welcoming the RBI's decision to cut its key lending rates by 25 basis points, SBI chairman Arundhati Bhattacharya said: "Our bank will take an appropriate call of a cut in base rate by looking at all evolving circumstances."
In January 2015, when RBI cut its rates for the first time this year, banks did not reduce their base rates.
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Getting some positive cues from the national budget tabled last week, and sensing an economic recovery, the RBI cut the repurchase (repo) rate has been cut to 7.5 percent from 7.75 percent, while the reverse repo rate has been adjusted to 6.5 percent from 6.75 percent.
"Banks may not be in a position to announce rate cuts immediately. They will discuss the issue with their asset-liability committee and come at a decision," Srinivas Acharya, managing director, Sundaram BNP Paribas Home Finance told IANS.
According to Abheek Barua, chief economist at HDFC Bank, the central bank presumably took comfort from an improvement in the quality of government spending that the 2015-16 budget unveiled and the soft consumer price index print for January.
He pointed out that the cash reserve ratio (CRR) and the statutory liquidity ratio (SLR) were kept unchanged at four percent and 21.5 percent respectively.
This retention of CRR and SLR rates will not release any additional funds into the financial system.
Barua said Wednesday's move is the second rate cut by the central bank outside the policy review (after a rate cut on 15 January 2015) .
"While the rate action is appropriate, we aren't quite convinced of the merits of its timing," Barua said.
He said the shift in the central bank's strategy to make out of turn rate cuts something of a habit is likely to increase market volatility instead of anchoring it.
"The out of policy move, in our view, highlights a sense of urgency that can only be associated with the RBI realizing that it could in fact be 'behind the curve' in terms of monetary policy action," he said.
According to him there is a prospect of another three repo rate cuts (75 bps) over the remainder of calendar year 2015 instead of our earlier view of another two cuts (50 bps).