Millennium Post

Why don’t you pass on rate cuts: RBI to banks

The RBI on Tuesday kept the key policy rate unchanged on fears of unseasonal rains impacting food prices, but nudged banks to lower lending rates while rejecting their contention that cost of credit remains high.

Promising an “accommodative monetary policy”, RBI Governor Raghuram Rajan however indicated rate cuts going forward depending on favourable macro economic data, and whether banks pass on the benefits of two rate cuts so far this year. While industry expressed unhappiness over the status quo on rates, Rajan said market dynamics will force banks to lower their interest rates.

“Comfortable liquidity conditions should enable banks to transmit the recent reductions in the policy rate into their lending rates, thereby improving financing conditions for the productive sectors of the economy,” he said.

The repo rate, at which the Reserve Bank of India lends to the banking system, will continue to be at 7.5 per cent and the cash reserve ratio, which is the amount of deposits parked with the central bank, will remain at 4 per cent. Bank rate has also been retained at 8.5 per cent.

“We are not looking for a specific number (on the bank rate cuts) and saying unless this happens, nothing more will happen. But we want to facilitate the process of transmission. “I do not see an environment where credit growth is tepid, banks are sitting on money and their marginal cost of funding (has) fallen, the notion that it hasn’t fallen is nonsense, it has fallen,” Rajan said after unveiling the first bi-monthly monetary policy for financial year 2015-16. RBI surprised the markets with two rate cuts of 0.25 per cent each outside the scheduled review meetings this year, but banks have yet to respond to these policy rate cut by lowering their lending rates.

After the policy announcement bankers said that most of them will have their asset liability committee meeting week to take a call on interest rates which besides repo rate depends on factors like demand for credit, cost of fund and deposit rates.

“We would see rates coming down as we see easing of interest rate cycle,” SBI Chairperson Arundhati Bhattacharya said. Commenting on the RBI’s action, Chief Economic Advisor Arvind Subramanian said: “It is on the expected lines.”

“With the RBI choosing not to reduce the policy interest rate, demand revival in the economy and pick up in the investment cycle would remain a tall order,” Assocham President Rana Kapoor said. The ball is clearly in the court of the banks to rise to the occasion since credit off-take has remained weak despite front loading of the two rate cuts, he said.

Rajan expressed the hope that competitive pressure and comfortable liquidity position would encourage the banks to cut lending rates. “Given that there has been very little transmission from rate cut so far...we are waiting to see transmission take place. I have no doubt that this will happen. If it happens sooner it is better for the economy,” he told reporters.

“The Reserve Bank will await the transmission by banks of its front-loaded rate reductions... into their lending rates,” said the policy statement.

Banking for the people

Short-term lending rate (repo) kept at 7.5%
Cash Reserve Ratio unchanged at 4%
RBI keeps Statutory Liquidity Ratio 21.5%
Estimates GDP growth of 7.8% in FY16
Forecasts CPI inflation at 5.8% by March 2016
CPI inflation to dip to 4% in August 2015’
Hailstorms in March affected 17% of rabi crop-sown area
State coop banks to be allowed to set up off-site/ mobile ATMs without prior approval from RBI
RBI to formulate scheme for market making by primary dealers in semi-liquid and illiquid G-Secs
Second bi-monthly policy statement scheduled on June 2

Interest-sensitive bank and realty stocks plummet

Interest rate-sensitive bank and realty stocks witnessed selling pressure after the RBI on Tuesday kept the key policy rate unchanged. Among realty scrips, Omaxe fell by 3.21 per cent, DLF was down 2.99 per cent, Indiabulls Real Estate lost 2.76 per cent and Unitech dipped 2.56 per cent on the BSE.

Others like, Prestige Estates went down by 2.33 per cent, Phoenix Mills (-2.20 per cent) and Sobha Ltd (-1.89 per cent). Following the losses in these scrips, the BSE realty index fell by 1.62 per cent to end at 1,771.05. Bank stocks also faced selling pressure, where AXIS Bank fell by 1.69 per cent, ICICI Bank was down 1.20 per cent, Kotak Mahindra Bank slipped 0.99 per cent and SBI fell 0.97%.
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