Reserve Bank of India Faces Trouble Getting Banks To Cut Rates To Pass On Benefits To Borrowers

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New Delhi: Lenders haven’t fully passed on the central bank’s latest interest rate cut to borrowers, pressuring the monetary authority to loosen policy even more to support economic growth.

A mismatch between deposits and credit growth, and competition from the government for small-savings mean banks face a high cost of capital, limiting their ability to transmit monetary policy easing. Bankers say the Reserve Bank of India’s 25 basis-point reduction in the repurchase rate to 6.25 % in February was a start, but was probably too little to have any impact on lending rates just yet.

Latest data from the central bank shows the main overnight lending rate offered by commercial banks has been sticky in a range of 8.15 percent to 8.55 percent since the beginning of the year. Most banks have trimmed lending rates by a ‘token’ 10 basis points, said Ashutosh Khajuria, chief financial officer at Federal Bank Ltd. in Mumbai, adding that the RBI needs to move by a bigger-than-usual 50 basis points to spur lending.

“If it is a 50 basis points cut, it will be an accelerated transmission,” Khajuria said. “If inflation behaves the way it has been,” rates will certainly go down in the first quarter of the next financial year starting April.

Calls for rate cuts have been building, given benign inflation and weak demand. Inflation has been subdued at about 2 %, much lower than the central bank’s medium-term target of 4 percent. The latest inflation data is due on Tuesday, with economists surveyed by Bloomberg forecasting consumer prices to rise 2.4 %.

Shaktikanta Das, the new RBI governor, has been trying to nudge bankers to lower lending rates, holding meetings with bank chiefs last month to discuss the monetary policy transmission. In India, rate adjustments take about six to nine months to work its way through the economy.

The State Bank of India, the country’s largest bank, Friday linked some of its deposits and and short-term loans to the repurchase rate. Its managing director P.K.Gupta told Bloomberg Quint that a quarter percentage repo rate change will have an impact of 7-10 basis points on the bank’s floating lending rate.

 

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