A cautious Reserve Bank of India (RBI) governor D Subbarao on Monday kept key lending rates unchanged, warding off mounting pressure for a repeat action to follow up on the central bank’s three successive rate cuts since January.
So, don’t expect your EMIs to come down.
The RBI also cautioned that a falling rupee, triggered by global factors, can potentially fan inflation negating the gains from in nearly two-percentage point drop in wholesale inflation over the last few months to 4.7% in May.
For a net importing nation such as India, the slide in the rupee that has shed over 8% since May, will only add to problems.
Things might just chance with finance minister P Chidambaram indicating last week that he would hold a meeting with chiefs of public sector banks to persuade them to lower lending rates.
But that may not be easy. Banks are in a fix as they are paying high rates to depositors from whom they raise money to lend. A cut in deposit rates can prompt them to move out of deposits to other assets such as gold or stocks.
"The only way to lower interest rates on loans would be to lower deposit rates but there is a problem there as that would mean banks’ borrowing which is primarily through deposits of people’s money would be hurt and business would be tight, so it would be a tight situation," Indira Padmini, general manager, retail banking and marketing, Indian Overseas Bank said.
Bankers say the repo rate set by the RBI (the rate at which central bank lends to commercial banks) is only one component of their costs. Deposit rates paid to those who park their funds with banks forms a major component of the costs, and they have stayed high and hence
To lower EMIs banks will have to cut deposit rates, bankers say, adding this is unlikely when deposit growth has remained muted.