Banks may cut lending rate up to 50 bps by Sept: BofA ML
It expects the Reserve Bank of India to signal lower rates but hold the rates until December. However, the central bank will take steps to improve liquidity.
Indian banks are likely to cut their lending rate by 25-50 basis points by September on an improvement in systemic liquidity, Bank of America Merrill Lynch has said in a note.
"We continue to expect banks to cut lending rates by 25-50bp by September atop the 25-50bp already done. In fact, SBI has already cut lending rates on auto and housing loans by 50bp. In our view, lending rate cuts hold the key to recovery," the note said.
It expects the Reserve Bank of India to signal lower rates but hold the rates until December. However, the central bank will take steps to improve liquidity, it said.
The investment bank sees the present 14 percent deposit growth as a bottom and by September the growth is expected to be 15 percent. It expects the Reserve Bank of India to cut banks' cash reserve ratio (CRR) by 50 basis points on 30 October and also to conduct open market operations (OMO) worth Rs 80,000 crore by March 2013.
Both CRR cut and OMOs infuse more cash into the banking system, thus improving the liquidity.
CRR is the proportion of deposits banks have to keep with the central bank and at present it is 4.75 percent after the RBI affected a 75 bps cut in March. In 2012, CRR was reduced by 125 bps, which released a total of Rs 80,000 crore into the system.
The central bank buys back government bonds through OMOs to infuse liquidity. In this financial year until June 22, the RBI has infused Rs 55,000 crore through such purchases.
BofA ML sees a loan growth of 15 percent by September, lower than the present more than 17 percent due to high lending rates.
It expects stagflation - an increase in prices due to fall in agricultural output - to push up inflation to 8 percent.
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