Banks using RBI rate cuts to their advantage: Ind-Ra

Banks are using the Reserve Bank policy cycle to their advantage and have been reluctant to pass on the entire benefit of the repo rate cut, leading to a complete "aberration" in monetary transmission, India Ratings said on Tuesday.

Since January 2015, the RBI has cut policy rates by a cumulative 125 basis points (bps), while banks have cut one-year deposit rates by an average 130 bps and lending by 50 bps, which includes the base rate cuts in the last one week. Base rate is the rate below which a bank cannot lend.

"In the last 18 months, three-month commercial paper and certificate of deposit rates have fallen by 150 bps. Thus transmission of policy rates has been more through market rates and banks deposit rates in the last one year," India Ratings said.

The rating agency further said that there is a clear aberration in monetary transmission which needs to be corrected so that the lower interest rates get passed on to borrowers.

Noting that while the central bank is likely to be accommodative, India Ratings said this stance is unlikely to benefit the end consumers unless there is better transmission.

"Ind-Ra expects the pace of transmission by way of lower lending rates to accelerate in the coming months, given the RBIs focus and the lagged impact of lower rates since January 2015," it said.

Bankers have been reluctant to transmit the entire policy rate cut to borrowers and have sought a reduction in interest rates on small savings schemes on fears of flight of cash from bank deposits to such schemes.