Rate cut by Banks

RBI says that Banks should create a soft rate environment in order to encourage healthy growth of the economy.  Here are the possibilities.

1. Few banks may reduce their lending rates from next week, which could create a positive market sentiment.
2. This cut is expected to be symbolic since we find sticky deposit rates coming in between in the smooth monetary spread.
3. RBI Governor had a meeting with the top Bankers of the country and advised them to reduce the overall financing cost in order to encourage investments.
4. RBI had reduced the Repo rates by 25 basis points recently however, the same was not found to be effective and banks have not so far come forward to reduce the rates as was expected.

 Bankers’ Feelings:

• Bankers attribute the tight liquidity position and the year-end pressure as the reason for not reducing the interest rates on deposits immediately. Adjusting the deposit rates is crucial in the rate dynamics under the MCLR system (Marginal Cost based Lending Rates).
• Mathematically bankers feel that there is no room for rate cut since MCLR remained almost flat compared to last month.
• They feel that the reduction in REPO Rate has paved way for lower borrowing costs and thus has helped banks mark-to-market investment gains.
• Also, several banks have asset liability committee meetings in the last week of February when a decision on interest rates is likely to be taken.

RBI views:

• RBI Governor feels that India needs softer rates to push economic growth.
• The recent high-frequency indicators show that investment demands are losing their track with the production of capital goods and import of capital goods slowing down in recent months.
• Also, RBI feels that there is growth in credit which is stated to be around 15%, which mostly is driven by Private Sector Banks only.
• PSU Banks have been lagging in credit release due to sticky loans.
• RBI Governor feels that food inflation has softened now consequent upon excess domestic supply conditions in respect of several food items, however, RBI has come forward to reduce the REPO Rates.
• RBI has revised growth outlook downwards to 7.4% for FY 20 from its earlier prediction of 7.6%.
• Also, RBI Dy Governor felt that an elevated level of inflation excluding food and fuel is causing concern.
• This he added was due to the upward risks coming up from oil prices, fiscal implications of sustained food deflation and lack of sufficient and continued downward adjustment in household inflation expectations over the past 12 months.