Banks are likely to cut deposit rates by about 125 basis points (bps) over the next six months due to the increase in their deposit base in the aftermath of demonetisation, YES Bank’s Managing Director & CEO Rana Kapoor said.
Mr. Kapoor also said he was hopeful that the Reserve Bank of India (RBI) would reduce the repo rate by another 100 bps in 2017-18, bringing it to 4% by March 2018.
Cost of funds
“A rise in deposit base will allow banks to lower the blended cost of funds as higher CASA deposits help to replace the high cost of borrowing and lower overall cost of funds,” Mr. Kapoor told The Hindu in an e-mail interview. “We expect banks to reduce deposit rates by about 125 bps over the next six months.”
“The new regime of Marginal Cost of Funds-based Lending Rate (MCLR) will immediately take into account the lower cost and will thereby lead to a decline in lending rates, which will boost economic activity in the medium-term,” Mr. Kapoor said.
He added that with improved monetary transmission, economic efficiency and structural moderation in the currency in circulation, there is likely to be a greater room for the RBI to ease its policy rate further. “I am hopeful that the RBI will ease by another 100 bps in 2017-18 to a repo rate of 4% by March 2018,” Mr. Kapoor said.
Regarding the upcoming Budget, Mr. Kapoor said that the government should aim to incorporate several direct tax concessions as these would be critical in helping to boost consumer spending.
“Especially against the backdrop of demonetisation, I believe this will be instrumental in providing an immediate thrust to household incomes and financial savings,” he said.
‘Double 80C limit’
Mr. Kapoor said that the 80C limit could also be increased to ₹3 lakh from the current ₹1.5 lakh.
“This will also help deepen the mutual fund industry and capital markets, as there is a large pool of funds which needs to be incentivised, from the Pay Commission roll-out,” the YES Bank chief said.
“As an additional step, I would also encourage bank deposits by reducing lock in for tax rebates to one year (from five years) and raise the threshold for mandatory TDS on interest income to ₹50,000 a year (from ₹10,000 currently),” he added.
