Lending, deposit rate cuts unlikely

Liquidity situation continues to remain tight; easing seen only from mid-April

The Reserve Bank of India’s (RBI) decision to cut repo rate by 25 basis points is unlikely to persuade bankers to reduce their lending rates immediately, as liquidity continues to remain tight.

“The repo rate cut is not enough for banks to reduce lending rates. Further revision in the cash reserve ratio (CRR) is required for interest rate reduction. We will look at revising our rates in the next financial year only,” Pratip Chaudhuri, chairman, State Bank of India (SBI), said. Most bankers had a similar view and expect interest rates to ease only from mid-April. “The transmission of Tuesday’s policy action is unlikely to happen immediately. The liquidity situation is still tight. We expect lending rates to ease from April, as the pressure on liquidity is less at the beginning of a financial year. Deposit rates will also be revised accordingly,” Shubhalakshmi Panse, chairperson and managing director, Allahabad Bank, said.

According to CRISIL, subdued deposit mobilisation and an all-time high credit-deposit ratio will limit banks’ ability to cut lending and deposit rates across the board. “During April-February 2012-13, the median base rate reduction of 10 banks was 20 basis points, while RBI reduced the repo rate by 75 basis points and the CRR by 75 basis points during this period,” the rating agency said. It expects banks to cut lending rates gradually and only selectively for some portfolios.

RBI also noted the liquidity deficit has remained above the indicative comfort zone. While the central bank did not reduce CRR, it promised to manage the liquidity situation actively through various instruments. The banking regulator has already decided to conduct open market operations (OMOs) on March 22, 2013, to inject up to Rs 10,000 crore in the system.

  “The reduction in repo rate by 25 basis points is a welcome move and indicates continued focus on growth. RBI’s commitment towards maintaining adequate liquidity in the system is important in the context of continued smooth functioning of markets,” Chanda Kochhar, managing director and chief executive officer, ICICI Bank, said.

“Liquidity will remain a concern and we expect RBI to support this through various instruments, including OMOs. Overall, RBI’s announcement was in line with expectations and pro-growth. Now, the focus will shift to managing our deficit and reviving a pro-investment environment,” Shailendra Bhandari, managing director and chief executive officer, ING Vysya Bank, said.