Bankers say liquidity boosts will lead to faster transmission

Terming the 0.25 percentage point repo cut as expected, bankers led by SBI chief Arundhati Bhattacharya on Tuesday welcomed the slew of liquidity management measures announced by RBI, saying it will result in quicker transmission of policy rates to lending rates.

An announcement or indication on rate review, however, remained elusive in the initial set of bankers' reactions. "The decision to keep liquidity deficit at neutral mode and also narrowing the LAF corridor will result in a predictable and stable liquidity regime going forward facilitating better transmission across financial markets," Bhattacharya said in a note. Stating that higher than normal systemic liquidity deficit had been a matter of concern, ICICI Bank's Chanda Kochhar welcomed the move on the liquidity management front as positive. "This should support the transmission of RBI's accommodative policy stance," she said.

HDFC Bank's chief economist Abheek Barua said the repo cut took a "backseat" because of the changes in the liquidity management regime.

"After six years of adopting a regime in which the central bank kept the liquidity in a deficit mode on average, the RBI indicated that it plans to move to a neutral liquidity position," he said, adding the measures have been introduced primarily to aid transmission. The RBI has been peeved with the bankers for not transmitting the entire range of benefits from the rate cuts of 1.50 per cent that it delivered since January last year. It has taken a slew of other measures to fasten the transmission process, including the introduction of the marginal cost of funding based lending rates for the short-term and successfully convinced the government to lower the interest rates offered on the small saving products, which compete with bank deposits.

But bankers had been blaming the liquidity tightness in the system for their aversion to passing on the benefits. South-based private sector lender Federal Bank's chief executive and managing director Shyam Srinivasan said the compounded effect of the rate cut along with the liquidity infusion makes the policy a "compelling" one.

"Policy does augur well for making it conducive to hit the desired economic growth by announcing adequate liquidity availability to the banking system," he said. Rana Kapoor of Yes Bank said shift in stance towards neutral money market liquidity conditions is a "testament of synchronous policy support" from the central bank.

State-run lender Bank of India recently appointed managing director and chief executive Melwyn Rego said the repo rate cut is growth positive.