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Impact of RBI rate cuts to remain muted
April, 11th 2019

The half a dozen banks which had lowered marginal cost based lending rate (MCLR) in March are likely to abstain from further rate action despite Reserve Bank of India’s signal for easier financing cost.

The rest including the bigger ones State Bank of India and HDFC BankNSE 0.90 % have taken the plunge with 5-10 basis points reduction in benchmark rate following RBI's second successive repo rate cut on April 4 but these are way below what was signaled by the central bank.

RBI has reduced the repo rate by a total of 50 bps in 2019 to push economic growth while banks are facing difficulty in passing on the benefit as deposit rates remain sticky.

Banks are not lowering their rates as deposit rates need to be lowered first. This cannot be done given the slow growth in deposits as households have shifted to equities and mutual funds. Currently, to meet their credit requirements they have been sourcing corporate deposits at a higher rate,” said Madan Sabnavis, chief economist with CARE Ratings.

RBI Governor Shaktikanta Das said he would hold “further consultations with stakeholders and work out an effective mechanism for transmission of rates.”

Lenders such as ICICI BankNSE -1.05 %, Bank of Baroda, Punjab National BankNSE -0.70 % and Union Bank of India reduced their respective MCLR by 5-10 bps in the next 40 days after RBI’s February policy action. “These may not go for further rate cuts,” a chief executive of a public sector bank said.

“The present scene only shows that monetary transmission cannot be enforced but has to happen through the market forces. What SBI is doing is a positive step as the cost of funds comes down when rates on high level savings account is lowered. Further, it should be remembered that when lending rates are lowered all loans get repriced while deposits get repriced only on renewal or on fresh deposits. Therefore, average cost will not go down for some time,” Sabnavis explained.

Impact of deposit rate cuts work with around six months’ lag.

“We are conscious of the fact that there has to be effective and appropriate transmission of the rates. After the last meeting, I had held meetings with public sector and private sector banks. The banks have cut MCLR by up to 10 basis points. But more needs to be done,” Governor Das had said on Aril 4 after announcing the second 25 bps rate cut in quick succession.

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