RBI holds key rates, hints at cuts in Q4

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Banks are unlikely to reduce interest rates until the Reserve Bank of India (RBI) eases the rate at which it lends to banks (repo rate). But RBI said that some cuts can be expected in the fourth quarter when there is greater certainty of inflation softening.

Banks continue to have excess liquidity, as credit growth remains sluggish. Going forward, however, they will have to take a call on lending rates depending on credit demand.

If there is big demand for credit in the fourth quarter, banks may still hold on to the current interest rates. But if credit growth does not pick up, they will have to cut interest rates to lure customers.

RBI, in its money policy review on Tuesday, did not change any policy rates. Explaining why it was not cutting even the cash reserve ratio (CRR), RBI said there were huge cash balances of the government with it. Once the government begins to spend, liquidity would be brought back into the system, RBI added.

Pratip Chaudhuri, CMD of State Bank of India, told Financial Chronicle: “Base rates are directly linked to deposit rates and CRR.”

“If there is no let up in the CRR, there is no trigger for us to reduce our rates, as the cost of funds remains the same. We still have excess liquidity and also excess SLR,” he added.

In the review RBI said, ‘Recent inflation patterns and projections provide a basis for reinforcing our October guidance about policy easing in the fourth quarter. However, risks to inflation remain and accordingly, even as the policy emphasis shifts towards growth, the policy stance will remain sensitive to these risks.”

Banks will find it difficult to bring down rates unless they get a direct liquidity infusion through a CRR cut or a repo rate cut. This reduces the cost of borrowing from RBI. Repo is a facility that let’s banks borrow overnight money from RBI.

Arun Kaul, CMD of Uco Bank, said, “There is no secular downward trend in inflation to let RBI reduce rates. The consumer price index (CPI) is still near double digits. Due to the huge government balances with RBI, liquidity is expected to be comfortable once the government starts spending. This restrains RBI from easing liquidity now. And whenever there is pressure on the exchange rate, RBI keeps liquidity tight in the system.”

Abheek Barua, chief economist of HDFC Bank, said in a release, “Given RBI’s October guidance … of policy easing only in fourth quarter, today’s review was never really meant to be an especially dramatic event.”

He said all the market was really looking for was a clear pro-growth signal from it, either by way of a more explicit policy easing guidance than was the case in October or by way of a CRR cut. “Unfortunately, RBI appears to have disappointed somewhat on both counts,” he said.

manjuab@mydigitalfc.com

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