Pointing out that Tuesday’s rate cut cannot immediately be passed on to borrowers, despite the MCLR, Arundhati Bhattacharya, chairman, State Bank of India, said, “Lending rates will come down, but only over a period of time. We must remember that banks depend more on deposits rather than borrowings for their funds. The rate of growth of deposits has been slowing and we need to ensure there is enough liquidity. But as we lower deposit rates, the transmission will be faster because we have moved to MCLR,” Bhattacharya said.
On a similar note, Keki Mistry, vice-chairman and CEO, HDFC, said, “There’s no case for a rate cut right away. However, if the liquidity situation in the system eases, and our cost of funds come down, one can expect rates to head lower going forward.”
With banks having adopted marginal cost of funds-based lending rates (MCLRs), interest rates in the system are already down by 25-50 bps and Tuesday’s 25 bps cut in the repo rate will further lower them, said Reserve Bank of India (RBI) governor Raghuram Rajan after announcing a 25 bps cut in the benchmark repo rate during the first bi-monthly monetary policy review for the new financial year. “Because of the MCLR, we already had a rate cut of 25-50 bps before the policy. As it (the rate cut on Tuesday) winds its way through the MCLR in the next few months, we’ll have more of a rate cut,” he said.
In order to achieve monetary transmission by ensuring that lending rates are sensitive to policy rates, RBI has introduced the MCLR as the benchmark for lending on April 1. Despite a 125 bps cut in the repo rate in CY15, banks brought their base rates down by a maximum of only 70 bps. “Our first estimate from the 26 largest banks in the system, accounting for about 83% of activity, has been that since the last week of March, the median overnight MCLR is down by 50 bps from the base rate and is down 25 bps across all tenors,” Rajan said exuding optimism on MCLR achieving the RBI’s objective.
On Tuesday, the governor also said that steps like reducing the minimum daily maintenance of the cash reserve ratio (CRR) from 95% to 90% and progressively moving away from a system that is liquidity deficit towards one that is liquidity neutral, will help better transmission. “The effects of the liquidity measures will also help transmission because banks have been continuously saying that they can’t transmit because of liquidity tightness. Now that we have given them enough liquidity, they have the ability to transmit even more. So, my hope is that we will see significantly more transmission in the next few months,” he said.
Giving a thumbs-up to such liquidity easing measures by the RBI, Dipak Gupta, joint MD, Kotak Mahindra Bank, said, “In this policy, RBI’s intention has accompanied execution. I think once we see liquidity in the market place, deposit rates too will come down and consequently lending rates will come down.” He added that one can expect rates to drift lower in about a month or so.
