RBI rate cut: Loan, deposit rates set to fall

Your wait for low­er equat­ed month­ly instal­ments, or EMIs, is final­ly over. Banks are will­ing to pare their lend­ing rates in the next few days, fol­low­ing the Reserve Bank of India (RBI)’s deci­sion to cut its repo rate (at which it lends to them) by 25 basis points (bps) on Thurs­day. At the same time, depos­i­tors will earn low­er inter­est as banks are expect­ed to reduce deposit rates to pro­tect their margins.

Unit­ed Bank of India (UBI) has already announced a reduc­tion in its base rate by 25 bps, and many oth­ers are set to mir­ror the move. “It was cer­tain­ly a sur­prise as bankers were expect­ing RBI to cut the repo rate only in Feb­ru­ary. We have reduced our base rate to 10 per cent, effec­tive from Feb­ru­ary 1,” P Srini­vas, man­ag­ing direc­tor and chief exec­u­tive offi­cer of UBI, told Busi­ness Standard.

Most bankers had a sim­i­lar view.

State Bank of India (SBI) chair­man Arund­hati Bhat­tacharya felt RBI’s action would prob­a­bly begin the much-await­ed rate cut cycle. “With glob­al crude oil and com­mod­i­ty prices expect­ed to be benign and infla­tion­ary expec­ta­tions mod­er­at­ing to sin­gle dig­it, the cur­rent dis­in­fla­tion­ary impe­tus is like­ly to be firm­ly entrenched and unwind­ing. We thus believe this cut (by RBI) may be the begin­ning of a rate eas­ing cycle,”

How­ev­er, the bank did not dis­close when it would cut its base rate. The country’s largest lender had reduced deposit rates by up to 50 bps between Octo­ber and Decem­ber 2014.

A few banks remain cau­tious, as an imme­di­ate lend­ing rate cut will stress their mar­gin in the cur­rent envi­ron­ment of mut­ed cred­it demand. Accord­ing to RBI, cred­it growth slowed to a three-month low of 10.5 per cent as on Decem­ber 26, 2014.

Jairam Srid­ha­ran, pres­i­dent and head of retail lend­ing at Axis Bank, said while banks will low­er lend­ing rates, it might not hap­pen imme­di­ate­ly. “We need to eval­u­ate the imme­di­ate impact on our poli­cies. While the incre­men­tal funds will come in at low­er rates, banks will need to assess how much of their cur­rent funds are bor­rowed at high­er rates and how soon they can extin­guish that,’’ he said.

Accord­ing to Rajesh Cheru­vu, chief invest­ment offi­cer at RBS Pri­vate Bank­ing in India, many lenders recent­ly reduced deposit rates and might not be low­er these fur­ther imme­di­ate­ly. “But the RBI move shows the pol­i­cy rate tra­jec­to­ry. With infla­tion and food prices com­ing down, momen­tum was build­ing up for a rate cut,” he added.

Ris­ing non-per­form­ing assets in the past few years have also impact­ed banks’ inter­est income as returns from earn­ing assets contracted.

“Lend­ing rates will come down but may hap­pen with a lag effect. Banks will first start reduc­ing deposit rates sharply. There had been some ratio­nal­i­sa­tion that had hap­pened in dif­fer­ent matu­ri­ties in deposit rates in the last quar­ter but banks were still hold­ing it up to pro­vide for infla­tion-adjust­ed returns. The rate cut sig­nals that infla­tion has been tamed and, there­fore, deposit rates will come down first. This will be fol­lowed by the lend­ing rate cut,” said M S Ragha­van, chair­man and man­ag­ing direc­tor, IDBI Bank.

How­ev­er, most lenders say rate cut is now a mat­ter of time.

“Bankers have been wait­ing to see how the cost of funds behaves before they cut their lend­ing rates. Most banks will start tak­ing a view on their lend­ing and deposit rates in the next cou­ple of weeks,” said Arun Kaul, chair­man and man­ag­ing direc­tor of UCO Bank.

Accord­ing to YES Bank, it will low­er its min­i­mum lend­ing rate by the end of this month. “Base rate cuts will now start soon­er than lat­er. I expect most major banks to cut rates with­in this month itself. The base rate cut by lenders will at least be to the tune of 25 bps. Even we are pos­i­tive­ly inclined to reduce our base rate by up to 25 bps and it should def­i­nite­ly hap­pen in Jan­u­ary itself,” said Rana Kapoor, man­ag­ing direc­tor and chief exec­u­tive offi­cer of YES Bank.

Canara Bank exec­u­tive direc­tor P S Rawat said the lender’s asset-lia­bil­i­ty com­mit­tee will meet “in a day or two” to take a call on rate revi­sion. Accord­ing to T M Bhasin, chair­man and man­ag­ing direc­tor of Indi­an Bank, while lenders have reduced inter­est rates selec­tive­ly on loan prod­ucts for the fes­tive sea­son, RBI’s move will set the tone for low­er­ing of banks’ base rate.

Cour­tesy: Busi­ness Standard