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The Reserve Bank of India's (RBI) decision to cut the repo rate on Wednesday may finally convince large lenders to pare their lending rates.
"With the government embarking on a path of qualitative fiscal consolidation and the formal adoption of inflation targeting, inflation trajectory is expected to stay benign and will aid banks in their decision making,” said Arundhati Bhattacharya, chairman of India’s largest lender State Bank of India. “Our bank will take an appropriate call of a cut in base rate by looking at all evolving circumstances."
The central bank lowered its policy repo rate by 25 basis points to 7.5 per cent, its second inter-meeting cut this year. RBI had cut the repo rate by 25 basis points on January 15, 2015. Both rate cuts this year have been outside the central bank's scheduled policy review meetings.
Only three banks had reduced their base rate following the repo rate cut in January. However, this time some of the large lenders is likely to trim their lending rates as deposit rates have been falling.
V R Iyer, chairperson and managing director of Bank of India, said the state-run lender will cut its base rate and deposit rates soon. "The ALCO (asset liability committee) will meet in a day or two. We will reciprocate RBI's action and budget announcements supporting growth...The liquidity is comfortable, so we can reduce our deposit rates," she said.
She added that demand for credit still continues to remain weak and expect it to improve only after two more quarters.
Rakesh Sethi, chairman and managing director of Allahabad Bank, said the bank's ALCO will meet on Thursday to explore the possibility of a lending rate cut. "A decision (on base rate cut) will be taken by the ALCO. In January, we did not reduce our base rate because our cost of deposits was unchanged. For lending rates to fall, deposit costs need to come down," he added.
United Bank of India (UBI), which was the first bank to reduce base rate in January, however, will not take the lead this time in reducing the lending rate.
"The timing (of the repo rate cut on Wednesday) is probably a surprise, but the action is certainly not. The government is expected to spend and push up growth,” said P Srinivas, managing director and chief executive officer of UBI. “Inflation is reasonably under control and may not be a concern unless oil prices increase sharply. Hence, a rate cut is on the expected lines...This time we will observe other banks' actions before reducing our base rate. It may be difficult for us to reduce rate in March.”
