Mumbai Interest rates will soon come down as banks will witness a sharp rise in deposits following the huge flow of old currency notes into banks in the next two months.
An increase in deposits will enable liquidity in the banking system at lower cost, thereby reducing fixed deposit rates. This will trigger reduction in lending rates.
The government’s move to ban R500 and R1,000 currency notes on Tuesday to curb black money from the system will also see inflationary worries getting addressed, given the moderation in currency circulation among the public.
“Extra cash will definitely help in increasing our CASA (current and savings account) money,” said Dipak Gupta, joint managing director, Kotak Mahindra Bank said. “There will be a small impact on rates but incrementally it would not be large. MCLR may see some reduction with some lowering of (fixed) deposit rates, though costs won’t come down immediately.”
MCLR (marginal cost based lending rate) is linked to cost of funds and deposits and inflation. Banks review MCLR every month and change rates accordingly.
Banks can use the extra liquidity to give loans to borrowers. Although there is less credit demand from the industry, lower rates may help small and medium sector enterprises, which are in need for funds.
South-based Canara bank has already reduced fixed deposit rates by 0.05-0.25 percentage points from 270 days to a 1-year period.
“We will definitely benefit on the CASA deposits and also see some recoveries and loan repayments. This may reduce some cost of deposits and MCLR may also see some reduction,” said Rakesh Sharma, MD and CEO of Canara Bank.
A senior executive of a large private bank said: “A good amount of at least R30,000-40,000 crore will come into the system. People will hold less cash in hand, and consumption demand will go down. So inflation will get addressed. Hence, the rates on fixed deposits will certainly come down quite sharply. I would not rule out 25-50 basis points (0.25-0.50 percentage points) rate cut from the RBI in December.”
“We grow more confident of our call of a 75 basis point (bps) cut in bank lending rates by September 2017,” according to a report by Bank of America MerrillLynch.