Bank of America Merril Lynch is betting on banks slashing lending rates by 50 bps by March

  • In February, the Wall Street brokerage had said in its report that Reserve Bank will reduce its key policy rates twice this year

  • RBI surprisingly cut its key lending rate by 0.25% to 6.25 as it sought to up the sagging growth amid a slowdown in inflation at its 7 February policy

  • Banks are beginning to cut deposit rates as the RBI's pro-active infusion of durable liquidity is set to close excess M3/credit demand gaps

Mumbai: American brokerage Bank of America Merrill Lynch (BOfA-ML) is betting on banks slashing their lending rates 50 basis points by March 2020.

In February, the analysts at the Wall Street brokerage had said in its report that Reserve Bank will reduce its key policy rates twice this year as it accommodates the concerns about growth amid the cooling price situation.

The RBI surprisingly cut its key lending rate by 0.25 percent to 6.25 as it sought to up the sagging growth amid a slowdown in inflation at its 7 February policy.

On Wednesday, within hours of the RBI slashing the key policy rates by an unconventional 35 bps to 5.4 percent, the largest lender SBI announced a 15 basis points reduction in its loan prices across categories, effective August 10. SBI's new one-year lending rate is 8.25 percent.

Ahead of the policy announcement the HDFC twins had cut their respective rates by 10 bps and a few other banks have also done since the June policy cut.

The RBI has been chiding the lenders to pass on more benefits of its easy money policy to borrowers but to not much avail. Announcing the 35 bps cut, governor Shaktikanta Das once again pointed out that after the RBI cut 75 bps between February and June, banks have passed on only 29 bps.

 Bank of America Merril Lynch is betting on banks slashing lending rates by 50 bps by March

Reuters

"We grow more confident of our call of a 50 bps bank lending rate cut by March reversing the 30 bps hike in 2018, to support recovery," BofA-ML said in a note on Thursday.

Banks are beginning to cut deposit rates as the RBI's pro-active infusion of durable liquidity is set to close excess M3/credit demand gaps.

In case NBFC concerns worsen, the RBI has opened a Rs 1.3 trillion liquidity window to fund banks' purchase of highly-rated paper from financially sound NBFCs.

Last month, SBI had slashed deposit rates on various tenors citing surplus liquidity and falling interest rate scenario.

"We expect banks to follow the SBI into deposit rate cuts," BofAML said, adding a 25 basis points deposit rate cut funds 30-35 bps of lending rate cuts. Banks will likely see higher earnings with the money market switching to reverse repo mode from repo mode, it said.

Banks should also see their cost of equity come off with the 180 bps fall in the 10 year since September.

"We estimate that a 100 bps drop in yields funds about 50 bps of lending rate cuts," it said.

It sees another 40 basis points repo rate cut by March call atop 110 bps in calendar year till date with the Fed cutting 75 bps by December.

--With PTI inputs

Updated Date: Aug 09, 2019 11:48:02 IST