With rates on hold, borrowers will get relief only with a lag

A medley of global and domestic factors weighed on the RBI’s rate action on Wednesday, as it chose to keep the repo rate unchanged at 6.25 per cent. This will limit the ability of banks to cut lending rates sharply.

However, borrowers could get some respite in fits and starts. For one, banks have been lowering the deposit rates sharply over the past month or so. Transmission of these cuts to lending rates are likely to happen with a lag.

Two, the RBI withdrawing the temporary hike in cash reserve ratio (CRR) introduced post-demonetisation, should give banks leeway to lower their marginal cost-based lending rates (MCLR).

By staying pat on rates, the RBI has tossed the ball in the banks’ court, to lower rates.

The RBI’s rate easing policy over the last two years has led to a sharp cut in deposit rates. The pace of cuts has been higher since the April policy, when the RBI moved from a deficit liquidity regime to one of neutral liquidity.

From April until November (before the demonetisation move), deposit rates had fallen by 30-50 basis points (bps) in leading banks across various tenures.

But with bank deposits swelling post-demonetisation, deposit rates have fallen by a substantial 25-50 bps in just one month. In some banks, the fall in November has been by a steeper 75 bps to over 1 percentage point.

Going ahead, banks are likely to cut deposit rates further. As on November 11, bank deposits outstanding were around ₹101 lakh crore. Post-demonetisation, bank deposits have gone up sharply.

After the recent extension of the limit under market stabilisation bonds to ₹6 lakh crore, the RBI, has decided to withdraw the incremental CRR hike from December 10.

This will help release some of the locked liquidity. Even if we assume that about half of the deposits coming into the system are withdrawn after restrictions are lifted, the growth in deposits at the end of FY17 fiscal will be substantial and way higher than the 9-10 per cent growth seen in 2015-16.

Hence, depositors can brace themselves for a further fall in deposit rates in the coming months.

To tackle the issue of transmission, the RBI introduced the MCLR framework in April this year, which to some extent has helped. Incremental lending rates have been more elastic than blended rates under the new structure.

For instance, the erstwhile base rates — mostly using the average cost of funds — remained unchanged for most banks since the April policy until November.

On the other hand, on an average, banks lowered their MCLR — calculated based on the latest rates offered on deposits — by 5-15 bps since April.

Since the October policy, some banks have lowered their base rates by a meagre 5 bps, MCLR rates have fallen by a higher 10-15 bps.

However, even under MCLR, lending rates have fallen only marginally when compared to the steep cuts in deposit rates. In the coming months, banks are likely to transmit deposit rate cuts to loan rates with a lag.

One of the key positives of the policy review is the withdrawal of incremental hike in CRR, which, to some extent, would have impeded cuts in the MCLR. This is because while computing the MCLR, the negative carry on CRR (which does not earn any interest) is taken into account.

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