News Analysis

RBI’s rate cut may not lead to significant reduction in lending rates

Radhika Merwin | Updated on April 04, 2019 Published on April 04, 2019

Liquidity constraints and a sticky bond yield will impede transmission

The RBI delivered on broad expectations of a repo rate cut, paving the way for lower lending and deposit rates in the coming months. While a few banks have trimmed their lending rates since the RBI’s February rate cut, liquidity constraints and a sticky 10-year G-Sec yield have impeded transmission. Hence, lending rate cuts have been little and few.

While the RBI cutting the repo rate by another 25 bps in its latest policy (50 bps in all this year so far) can nudge more banks to trim lending rates, a high credit-deposit ratio, high currency in circulation, persisting pressure on banks’ deposit growth and fiscal concerns exerting pressure on bond yields -- will cap the extent of lending rate cuts by banks. Hence, significant reduction in deposit and lending rates is unlikely. Also the RBI had proposed use of external benchmarks to peg the lending rates of retail/ personal loans and loans to micro and small enterprises, to improve transmission. This has been deferred for now.

What is important to note is that the RBI has not changed its stance from neutral to accommodative as was expected in the market. This will also temper banks’ rate cuts. Nonetheless, given the uncertainty on future inflation trends and fiscal worries, RBI’s status quo on stance and not going overboard on a rate cut (50 bps repo rate cut expectations had been doing the rounds) are hugely welcome.

In a nutshell, depositors can heave a sigh of relief as deposit rates are unlikely to move sharply lower in the near term. For borrowers, a reprieve will come only in fits and starts.

Small moves

Since the RBI’s repo rate cut of 25 bps in February, banks have hardly cut deposit rates, owing to persisting pressure on deposit growth. Deposit rates for public sector banks are already significantly lower than most private sector banks, offering less leeway to trim rates.

On the lending rate front, however, few banks have trimmed their benchmark one-year MCLR (marginal cost of funds lending rates), but just by 5-10 bps. Leading banks such as HDFC Bank and SBI are yet to cut their MCLR (no action until April 3).

While the RBI’s Thursday policy rate cut of another 25 bps may nudge more banks to trim lending rates, widespread and substantial cuts are unlikely. Even though liquidity has improved thanks to recent foreign inflows, RBI’s open market operations (OMOs of around Rs 2.9 lakh crore in FY19) and recent dollar swap (injecting Rs 34,500 crore) may not be enough to ensure smooth monetary policy transmission. Higher currency in circulation, a high credit-deposit ratio and fiscal worries will impede transmission, implying lower lending rate cuts by banks. While the RBI has announced a second dollar swap auction on April 23, which can ease up liquidity pressure, it may not be enough to improve transmission.

Published on April 04, 2019

A letter from the Editor


Dear Readers,

The coronavirus crisis has changed the world completely in the last few months. All of us have been locked into our homes, economic activity has come to a near standstill. Everyone has been impacted.

Including your favourite business and financial newspaper. Our printing and distribution chains have been severely disrupted across the country, leaving readers without access to newspapers. Newspaper delivery agents have also been unable to service their customers because of multiple restrictions.

In these difficult times, we, at BusinessLine have been working continuously every day so that you are informed about all the developments – whether on the pandemic, on policy responses, or the impact on the world of business and finance. Our team has been working round the clock to keep track of developments so that you – the reader – gets accurate information and actionable insights so that you can protect your jobs, businesses, finances and investments.

We are trying our best to ensure the newspaper reaches your hands every day. We have also ensured that even if your paper is not delivered, you can access BusinessLine in the e-paper format – just as it appears in print. Our website and apps too, are updated every minute, so that you can access the information you want anywhere, anytime.

But all this comes at a heavy cost. As you are aware, the lockdowns have wiped out almost all our entire revenue stream. Sustaining our quality journalism has become extremely challenging. That we have managed so far is thanks to your support. I thank all our subscribers – print and digital – for your support.

I appeal to all or readers to help us navigate these challenging times and help sustain one of the truly independent and credible voices in the world of Indian journalism. Doing so is easy. You can help us enormously simply by subscribing to our digital or e-paper editions. We offer several affordable subscription plans for our website, which includes Portfolio, our investment advisory section that offers rich investment advice from our highly qualified, in-house Research Bureau, the only such team in the Indian newspaper industry.

A little help from you can make a huge difference to the cause of quality journalism!

Support Quality Journalism
This article is closed for comments.
Please Email the Editor