Left with no choice, bankers ready to lower lending rates
With a second repo rate cut in quick time, the Reserve Bank of India has left banks with no choice but to go ahead and reduce their lending rates to provide a fillip to economic growth in the country.
Bankers hinted at lowering lending rates, but stressed monetary policy gets transmitted with a lag. In yet another surprise move, the RBI reduced the repo rate by 25 bps to 7.50 percent.
"Since there is a lag effect for monetary transmission, the effect of the previous 0.25 per cent cut together with the present reduction would accentuate banks to review their base rates," Indian Banks Association (IBA) Chairman and Indian Bank chief T M Bhasin said.
Country's largest bank SBI also hinted at a review of its base rate or the minimum rate of lending.
"Our bank will take an appropriate call of a cut in the base rate by looking at all evolving circumstances," State Bank of India (SBI) Chairperson Arundhati Bhattacharya said.
Normally, it takes about 2-3 quarters for the transmission of policy rate actions to loan rate cuts, as a loan rate cut immediately impacts margins while deposit rate changes are applicable only to incremental deposits.
Largest private sector lender ICICI Bank's Managing Director and Chief Executive Chanda Kochhar welcomed the rate cut, but did not say whether she will pass on the lower cost of funds to borrowers.
Repo cut is a welcome step that demonstrates RBI's comfort with the inflation outlook and its responsiveness to emerging indicators, Kochhar said.
"It also reflects the number of institutional reforms and policy measures outlined in the Budget, which lay the foundation for sustainable growth," she added. The cut should help move the economy forward on a positive growth path, Kochhar said further.
"With the government embarking on a path of qualitative fiscal consolidation and the formal adoption of inflation targeting, inflation trajectory is expected to stay benign and will aid banks in their decision making," Bhattacharya said.
According to an India Ratings report, from early-2012 till January 2015, Base Rate, or the minimum lending rate, cuts of Indian banks have been limited to 25-40 bps as against a net 75 bps reduction in the RBI's repo rate.
Meanwhile, deposit rates have come off by 75 bps during the same period.
Reserve Bank Governor Raghuram Rajan, who has been critical of banks for not passing on the benefits of a rate cut in the past, reiterated that lenders tend to be faster in raising rates than cutting rates. Terming it as an asymmetric relationship, Rajan said the RBI will examine if there are any constraints in passing on cuts. "My hope is that over the span of the next few weeks, as we move in to the new fiscal, we will see more transmission into lower interest rate," Rajan told analysts over a concall after the surprise action.
The RBI has also changed the methodology of determining the base rates, hoping for a quicker transmission of its policy measures.
Even though banks have already cut deposit rates, Rajan had said they might be utilising the expansion in margins to repair their balance sheets.
Interestingly, even the demand for credit is not forthcoming due to sluggish growth and also the availability of money market alternatives for large borrowers where rates are lower.
State-run Bank of Maharashtra's Executive Director R K Gupta said the rate cut shows the central bank's comfort about the quality of fiscal consolidation and is positive for growth. Private sector lender Yes Bank's Rana Kapoor said he expects cuts of 1.50 per cent more this fiscal which will help boost the sentiment and re-ignite investments.