Though bankers have welcomed the cut in the policy rate by the Reserve Bank of India, retail lending rates are unlikely to see a reduction anytime soon. Banks, it appears, will wait a while, and watch how things pan out in the coming days before taking a call on cutting retail lending rates.
Nevertheless, they have hailed the RBI’s action in reducing the policy rate.
“The reduction in repo rates by 25 basis points is a welcome move, and indicates continued focus on growth. At the same time, RBI’s commitment towards maintaining adequate liquidity in the system is important in the context of continued smooth functioning of markets,” said Chanda Kochhar, Managing Director and CEO, ICICI Bank. The RBI’s policy actions, together with the measures taken by the government on the fiscal and investment fronts, according to her, “indicate continued overall policy support for a revival in economic growth.”
H. S. Upendra Kamath, Chairman and Managing Director, Vijaya Bank, said he was “a bit disappointed” that the central bank did not cut the cash reserve ratio (CRR).
Mr. Kamath pointed out that banks had borrowed Rs.1.30 lakh crore under the Liquidity Adjustment Facility (LAF) last week, which, he said, was “way above the comfort level of the RBI.” Referring to the “liquidity stress” in the financial system, he said, “I am slightly disappointed, but may be the RBI may inject more liquidity via open market operations,” he said.
Observing that repo-based borrowing accounts for a small fraction of banks’ borrowings, Mr. Kamath said the industry still faced high interest cost on deposits it mobilised. “Inflation is the main problem because it does not allow us to reduce interest rates on deposits,” he argued. Banks, he observed, would find it difficult to cut deposit rates in March, which was traditionally the season in which “they need to build their balance sheets.”
The growth of bank credit to almost all sectors, barring agriculture, had either been stagnant or lower than last year, Mr. Kamath pointed out. “Every reduction in interest rate does not necessarily translate into faster economic growth,” he said.
M. Narendra, Chairman and Managing Director, Indian Overseas Bank, felt that the RBI had taken a bold decision to take forward the stance of monetary easing to stimulate growth by announcing a further cut of 25 basis points in repo rate. By stating that the headroom for further easing remained quite limited, the RBI put the industry and government on notice to sustain the recovery, he said. The policy transmission by banks on reduction of the base rate might take place next month once liquidity improved, Mr. Narendra said in a statement.
Indranil Pan, Chief Economist, Kotak Mahindra Bank, said the monetary policy statement remained relatively more hawkish than one would have expected in the midst of a rate cutting cycle. A further worsening of the structural conditions, in turn, could risk ratings downgrades, and hence, adversely affect flows, Mr. Pan said.
Central Bank of India Chairman and Managing Director M. V. Tanksale said the rate reduction certainly would reduce the cost of borrowing for the banks “but I cannot say how it is going to shape up in the reduction of the base rate”.
“Immediate transmission before the end of March, I think, will not be possible from the bankers side,” Bank of India Chairperson and Managing Director V. R. Iyer said.
Bank of Baroda Chairman and Managing Director S. S. Mundra said: “There is certain direction which is visible to us. I don’t see any immediate action. But come April or mid-April, there would be much clarity on liquidity position.”