Slow stimulus

The decision by leading public sector banks to slash their marginal cost of funds-based lending rate by 65 to 90 basis points at one go is welcome, if long overdue. While the quantum of rate cuts is unusual, the move itself isn’t a surprise. With the Reserve Bank of India easing its policy rates by as much as 175 basis points in the last two years and deposit rates falling by a similar margin, banks would have found it difficult to justify not passing on their reduced costs to borrowers. Demonetisation proved to be the final blow for lowering of rates. Flush with funds even as credit offtake grew at a tepid 5.8 per cent in December, banks had no choice but to act now.

While cheaper money is bound to have a stimulating effect on the economy as a whole, the extent to which different segments benefit may be uneven. On retail borrowings, reductions in the MCLR apply only to new loan applicants; existing borrowers will continue to pay earlier card rates unless they switch their lender or choose to reset their rate by paying a fee to the bank. Banks also have the flexibility to tweak the ‘spreads’ charged to retail customers over and above the MCLR and they will likely use this leeway to pad up their net interest margins. India Inc as a whole may receive a leg up to its earnings from these cuts (coming on top of the 90-100 basis point fall in borrowing costs in the last couple of years), as working capital turns cheaper. But whether the lower cost of capital alone will nudge companies to dust off their investment plans is a question mark, given low capacity utilisation on existing facilities and a weak demand environment thanks to sub-normal cash levels in the economy. Even within India Inc, companies with low leverage and high credit ratings may be able to wrangle more benefits from banks, while highly leveraged firms may find this difficult. Real estate is usually the biggest sectoral beneficiary from a rate cut as falling loan rates usually stoke housing demand. But with property transactions stalled by the black money crackdown and the sector in the midst of a regulatory transition, rate cuts may prove less of a stimulant this time around.

In short, under normal circumstances, lending rate cuts of this order would have been guaranteed to boost consumer sentiment and retail loan growth, buoy up corporate profits and the Sensex — all of which would add up to a sizeable kicker to the GDP. But given the continued cash crunch, negative wealth effect, the prospect of job losses in the informal sector and other uncertainties unleashed by the note ban, such a revival cannot be taken for granted this time around. High-frequency data on automobile and durable sales, cement despatches and retail loan growth will need to be watched closely for signs of a turnaround in consumer confidence.

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