New Delhi: The Reserve Bank of India (RBI) is finding it difficult to make lenders slash interest rates for borrowers, thereby preventing the benefits of rate cuts from trickling down to people. The Central bank is now forced to loosen its policy further to support economic growth. Because of the disparity between deposits and credit growth and competition from the government for small-savings, banks face a high cost of capital. This, in turn, restricts their ability to transmit rate cuts announced by the RBI.
The monetary policy committee’s (MPC) decision to cut the repo rate by 25 basis points to 6.25 percent last month was just the beginning, bankers said. However, the reduction was possibly too little to have any impact on lending rates as of now.
RBI’s latest data shows that the main overnight lending rate provided by commercial banks ranged from 8.15 percent to 8.55 percent since the start of 2019.
50 basis points will spur lending
Ashutosh Khajuria, chief financial officer at Federal Bank Ltd, said that most lenders have lowered lending rates by a “token” 10 basis points, adding that the Central bank needs to move by a bigger-than-usual 50 basis points to spur lending.
“If it is a 50 basis points cut, it will be an accelerated transmission,” Khajuria said. He added that the rates will go down in the first quarter of the next fiscal “if inflation behaves the way it has been.”
Household financial savings at its lowest
Most lenders are cautious and “are not willing to cut rates as deposits and household financial savings are at historical lows,” said Prachi Mishra, chief India economist at Goldman Sachs India Securities. “Even while policy rates are down, the rates paid by the government on small savings are significantly higher than bank deposit rates,” she added.