Cutting lending rates before RBI actually cuts real rates to help banks: Mythili Bhusnurmath

In a chat with ET Now, Mythili Bhusnurmath, Consulting Editor, ET NOW, shares her views on banks. Excerpts:

ET Now: Start off essentially with the news on key banks SBI, Axis Bank cutting deposit rates?

Mythili Bhusnurmath: It is a clear signal that the market believes that there is excess liquidity in the market and they are cutting deposit rates but the RBI’s transmission mechanism. In fact this makes the RBI stance even more inexplicable because the monetary transmission is not just working but is not having the opposite effect. In fact because the RBI sending a signal of keeping rates constant, they want to have a tight monetary policy but the banks suggest cutting rates regardless. So the governor’s argument that it is not just the monetary transmission that is not working, he talked of the RBI signal as being a signalling the RBI’s rate stance is a signalling device but I do not even seem to see it as a signalling device because banks clearly are not taking any heed of what the RBI stance is. So this really aids a very strange kind of situation where the central bank wants to send one signal and are completely heedless of that signal. So at some point of time one of the other party has to give either deposit growth will slow down and banks will have to reverse interest rate stance or the RBI will have to reverse its interest stance. Given the fact that we have disinflationary tendencies all over the world it will be the RBI which will have to blink first.

ET Now: Just to give a spin to your thought process currently the credit cycle has not picked up, deposit rates have gone down, what are the chances that banks actually could start cutting lending rates before RBI actually cuts the real rates?

Mythili Bhusnurmath: Well there is a possibility because clearly what drives lending rates is your cost of funds. So if your cost of funds comes down and even if you want to preserve the same net interest margin there would be a case for cutting the lending rates but the question is that if you do cut lending rates, will credit offtake automatically pick up; not necessarily but it will certainly help at the margin because along with the government taking a number of steps to clear the procedural bottlenecks to remove the structural impediments, if interest rate comes down then certainly it will help the credit offtake to happen. But banks mind you lend only for working capital. So what we really need to see is long term investment happening but that also will help because long term rates, short term are all linked in a larger sense; to that extent if banks are able to cut their lending rates it should certainly help.