Bank lower deposit rates; Are lending rate cuts on the way?

With two public sector banks cutting deposit rates and liquidity tightness seen easing, hopes are floating that lenders will soon start cutting their base rates, bringing down the lending rates in the economy.

Punjab National Bank and Oriental Bank of Commerce are the two banks that cut deposit rates yesterday. While the former cut fixed deposit rates by up to 200 bps on different maturities, the latter has cut rates up to 50 bps on new deposits with short tenures.

[caption id=“attachment_683028” align=“alignleft” width=“380”] The central bank conducts OMOs to purchase government bonds. Reuters[/caption]

According to a report in the Business Standard, more banks are likely to cut deposit rates.

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“By mid-April, I think deposit rates will be realigned substantially,” S S Mundra, chairman and managing director of Bank of Baroda, has been quoted as saying in the report. This is likely to be followed by lending rates, but depending on the cost of funds and liquidity situation. BoB will also review its rates during that time, he said.

The liquidity deficit in the banking system as measured from banks’ daily borrowings from the RBI liquidity adjustment facility window stands at about Rs 80,000 crore to 1 lakh crore. This is much higher than the RBI’s comfort zone.

Wide expectation is that there will be an improvement in the liquidity scenario. According to another report in the BS, market players expect the Reserve Bank of India’s (RBI) open market operations (OMOs) in the government bonds market and muted credit growth during April-September to boost liquidity.

The central bank conducts OMOs to purchase government bonds, which in turn boosts liquidity in the banking system.

Suyash Choudhary, head-fixed income, IDFC Mutual Fund, expects the RBI to purchase bonds worth Rs 60,000-70,000 crore in the first half though OMO, the report said. In April-May, Rs 50,000-55,000 crore will go out of the banking system, which will have to be offset by OMOs, he said.

According to the report, the RBI is holding Rs 70,000 crore surplus cash with the RBI. A major part of this cash will be spent in 10-15 days, which will bring down the prevailing liquidity deficit. But once the currency in circulation increases towards the end of this month, again liquidity deficit will widen. This will prompt the RBI to conduct OMOs, said the BS report.

The RBI’s next policy statement review is also in May. According to a report in the Economic Times today, bankers, in their pre-policy meeting with the central bank, are likely to seek a 50 bps cut in their cash reserve ratio (CRR) in the review.

CRR is the proportion of deposits banks need to keep with the RBI. Currently the ratio stands at 4 percent and repo rate, which is the central bank’s policy rate, stands at 7.5 percent.

The report quoted unnamed bankers as saying that a 50 bps reduction in CRR will put them in a better position “to transfer the benefits of lower rates to borrowers”.

It is unlikely that the RBI will heed to the bankers. But even if the central bank did not cut the rates or CRR, banks will have to reduce lending rates if liquidity situation improves.