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Despite 200 bps cut in the cash reserve ratio and 100 bps reduction in the repo rate by the Reserve Bank of India since January 2012, response by banks in cutting lending rate was not commensurate. In the last 15 months, most public sector banks have reduced their base rate by maximum 50 bps, while State Bank of India has reduced it by 30 bps while ICICI Bank and HDFC Bank has reduced by 25 bps and 40 bps respectively.
Leading banks have indicated that cut in interest rate will only be possible if more liquidity is infused in the system by either the cash reserve ratio or by open market operations. Banks are expecting liquidity infusion measure in the annual policy review of the central bank scheduled on 3 May.
CRR is the proportion of deposits that banks have to keep with RBI as cash. At present, CRR is at 4%. Tight liquidity has prevented lenders to cut their base rate sharply, bankers said.
Pratip Chaudhuri, chairman, State Bank of India, said in an interview to Business Standard, that he expects the central bank to reduce the CRR by 100 bps following the favourable developments that occurred in the last couple of weeks in terms of softening of global commodity prices. According to Chaudhuri, a 100 bps cut in CRR will release about Rs 12,000 crore for the bank which will enable him to reduce their base rate by 20 bps. SBI’s base rate is currently at 9.7%.
According to market participants, while a CRR cut or open market operations will yield the same result but RBI may look to save the CRR tool for a rainy day.
“The market has run ahead in expecting a rate cut on 3 May, reacting to the favourable developments of the recent past, starting with lower-than expected WPI inflation data and bolstered by lower commodity prices and lower gold prices,” said Joydeep Sen, senior vice president, of BNP Paribas Wealth Management.
“On the liquidity front, the RBI should take some measure for easing, for the sake of passing on lower signal rates to the ground,” he added.
In the last policy review meeting on 19 March in which RBI reduced the repo rate by 25 bps and kept CRR unchanged, but announced bond purchases by open market operations, after the close of market hours.
