Lending rates are set to fall current quarter onwards, irrespective of whether the Reserve Bank of India eases policy rate on Tuesday or not.
Any accomodation on the repo rate or the reserve ratios will only hasten the process of base rate cuts, bankers said. “If we see a rate cut on Tuesday, it could hasten the base rate cut,” said Ram Sangapure, the executive director at Punjab National Bank, the third largest public sector bank by assets.
RBI will release first bimonthly policy for 2015-16 on Tuesday and is expected to keep repo rate unchanged. But some bankers hope that the central bank would either provide a leeway on maintenance of cash reserve ratio or even cut the CRR (currently at 4%) to infuse liquidity.
RBI had pared its repo rate twice in the last three months by a cumulative 50 basis points but most banks have only responded through cuts in deposit rates.
Bankers say so far there has been no material benefit on the cost of funds even though deposit rates have been cut. This is because rate change take effect only on incremental deposits, the overall benefit on cost takes time.
Dena Bank slashed its deposit rates on Monday by 150 bps but has not slashed base rate which stands at 10.25%.
“Changes in policy rates affect the lending rates with a lag. I think lending rates should start falling this month onwards,” said P Mukherjee, group executive of corporate relationship & international banking at Axis Bank.
Indeed banks started cutting deposit rates in July 2014 and till December, most banks had slashed deposit rates across maturities. However, base rates have been unchanged for almost two years now.
“Cost of funds has not come down materially yet for us. If banks have some leeway, it would be easier for them to cut base rate,” said Shyam Srinivasan, MD & CEO of Federal Bank. Bankers want RBI to allow them to bring down daily maintenance under cash reserve ratio to 70% from 95% earlier.
While some bankers believe another cut in repo rate would nudge base rates lower, others want RBI to ease reserve ratios as well. Arundhati Bhattacharya, the State Bank of India chairman, had told a television channel that she had requested RBI for a CRR cut.
“For base rates to come down, the cost of liquidity is more important than just the availability. Reducing the repo rate would help,” said Mukherjee of Axis Bank.
