Govt to Lean on PSU Banks for Rate Cut
Banks are reluctant to pass on full benefit of lower RBI policy rate that is needed to shore up economic growth
Dheeraj Tiwari & Vinay Pandey
New Delhi: The government will lean on state-run banks that are reluctant to pass on the full effect of measures taken by Reserve Bank of India (RBI) in the form of rate cuts that are badly needed to shore up growth.
After RBI lowered the policy rate by 25 basis points and took a range of measures to enhance liquidity, the government feels banks have little excuse not to pass on benefits to consumers. One basis point is 0.01 percentage point. “We would want the banks to reduce rates latest by May 1. We will exert pressure on banks to do so,” a top government official told ET. Some banks had cut rates marginally after the new marginal cost of funds based lending rate (MCLR) regime was rolled out at the start of the month, but the government feels there is room for much more. “The banks will perhaps need to do some more of transmission of the reduction in policy rates by RBI,” economic affairs secretary Shaktikanta Das had said after RBI cut the repo rate on Tuesday.
Before that, the government had done its bit by cutting the small savings rate sharply. This addressed the concern of banks that they are unable to cut deposit rates because of the high rate of returns offered on small savings.
Ahead of the latest cut, RBI had lowered the repo rate, the key policy rate, by a cumulative 125 basis points since January 2015.
The response of the banks, or monetary policy transmission, has been far less enthusiastic. Median term deposit rates fell only 80 basis points over the period while the floor lending rate, or base rate, declined even less — 60 basis points.
In its monetary policy statement on April 5, RBI highlighted the need for greater transmission.
“Perhaps more important at this juncture is to ensure that current and past policy rate cuts transmit to lending rates,” it said, hoping that the introduction of MCLR should improve transmission and magnify the effects of the current policy rate cut.
Another senior government official told ET that the construction sector’s revival is crucial to the economy picking up pace.
A lowering of lending rates just before the Seventh Central Pay Commission award boosts salaries can help trigger housing demand, he said, explaining the urgency. Apart from this, lower rates could also help revive private investment. RBI expects the economy to grow 7.6% in the current fiscal, same as the last one. Some banks had cut rates as the MCLR debuted. They want to see a decline in deposit costs before taking a call on lending rate cuts.
The liquidity measures will take about a month to have an effect.
Government Wants More
“Any transmission of rate cut announced by RBI comes with a lag which will also be based on the marginal cost of deposit under the new regime,” the managing director of a bank said, adding that lenders are aware of the government's sensitivity on rates. “The cut in rates of small saving schemes has been just announced, so hopefully new deposits will be raised on lower cost thus giving us the leeway to cut rates.”
Independent experts reckon con- Deposits growth has fallen sharply Liquidity measures will take some times to take effect
Some banks had cut rates marginally after the new MCLR regime was rolled out this mth, but the govt feels there is room for more
ditions have improved for monetary transmission.
Liquidity measures are likely to remove a key impediment to better monetary transmission, said Pranjul Bhandari, chief India economist at HSBC.
“Alongside, reduction in the small savings rate and introduction of the marginal cost of funds based lending rate (MCLR) are likely to improve transmission,” Bhandari said in a note after the policy was announced.