The Hindu Business Line : Repo cut indicates rates may have peaked

The Reserve Bank of India announced on Monday that it would cut the repo rate (the rate at which banks borrow money from RBI) with immediate effect under Liquid Adjustment Facility by 100 basis points from 9 per cent to 8 per cent. This is the first time the benchmark rate is being cut after RBI embarked on a tightening regime since 2004.

Easing liquidity

This move, coming on the heels of a reduction in the banks’ CRR and SLR (Statutory Liquidity Ratio) requirements, is obviously intended to help ease the tight liquidity conditions prevailing in the recent weeks.

However, the quantum of the cut in the rate also suggests that this may be a signal on interest rate direction. Interest rates in India may have peaked and could come down in coming months.

The cut in repo rate will allow banks to borrow at 8 per cent against their excess securities after meeting the SLR requirements.

As on September 23, the investment/deposit ratio of all the banks stood at 28.6 per cent, out of which SLR securities account for 24 per cent. This suggests headroom amounting to about 4.6 per cent of deposits, with which they can now borrow more than Rs 1,80,000 crore at 8 per cent, from the repo window.

While this may help banks tide over the liquidity crunch to some extent, whether banks are able to ramp up lending will depend on their ability to source deposits.

CRR cuts in the previous weeks have not prompted banks to lower their deposit rates. Apart from high credit off-take, sale of oil and fertiliser bonds, Government bond auctions and dollar selling by RBI are also cited as reasons for liquidity drying up. All this is probably what prompted RBI to cut the key repo rate.

Outlook

Banks (especially PSU banks) may be under pressure to reduce lending rates with the message coming clearly from the Government that growth is now a greater priority than inflation.

Banks are expected to cut the lending rates in coming months and deposit rates too may ease. Stability in the equity market may also help a shift from high-cost deposits to low-cost deposits.

Lower lending rates, as and when they materialise, may also alleviate concerns about defaults and deteriorating quality of banks’ portfolios. But if the deposits remain hard to come by, they may have to take hit on the net interest margins.

More Stories on : CRR & Bank Rates | Credit Market | RBI & Other Central Banks

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