Loan rates may not come down immediately even though the Reserve Bank of India (RBI) on Thursday cut the repo rate by 25 basis points (bps) for the third time in 2019. Bankers say the improved liquidity situation may not translate into lower deposit rates as banks remain wary in an environment of slow deposit growth. That, in turn, could result in lending rates remaining close to where they are now.
A senior executive at a large state-owned bank told FE: “It’s difficult to say whether deposit rates will fall. Our deposit rates are lower than that of most other banks. The banks who have much higher rates may have to start cutting the rates.”
Large public-sector banks (PSBs) and private banks may adopt separate strategies, as the latter set pays out relatively more for deposits, leaving them with greater room to cut deposit rates. State Bank of India (SBI) pays 7% per annum for one-year retail term deposits. While the monetary policy committee (MPC) has lowered the repo rate in each of its meetings in 2019, SBI has actually raised the rate on one-year deposits by 20 bps between February and May this year.
Bank of Baroda (BoB) pays an even lower 6.7% on one-year retail deposits, while HDFC Bank offers 7.3%.
RBI governor Shaktikanta Das observed that the weighted average lending rates (WALRs) across the system show that banks have trasmitted to the extent of 21 bps on fresh rupee loans the 50 bps worth of rate cuts in 2019.
“Interest rates on lower-tenor money market instruments remain broadly aligned with the overnight WACR (weighted average call rate), reflecting near-full transmission of the reduction in policy rates,” Das said at the post-policy press conference, adding that the yield on the benchmark 10-year government security has also declined by about 40 bps from its average in April 2019 to about 7%.
However, the monetary policy statement highlighted that the WALR on older rupee loans increased by 4 bps as the past loans continue to be priced at high rates.
On the RBI’s older proposal to link lending rates to one of three external benchmarks for better transmission, Das said the matter needs further examination. “We are monitoring the transmission. So as soon as we take some decision in that regard, we will announce that.” In its April policy, the RBI had deferred the implementation of the new external benchmark-linked framework for pricing of loans, which was earlier supposed to come into force on April 1, 2019.