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Will banks take the rate cut hint?

RBI has thrown enough hints to softening interest rate shortly, though did not touch any of the key rates, reports BS Srinivasalu Reddy.

business Updated: Jan 29, 2008 23:25 IST
BS Srinivasalu Reddy

The Reserve Bank of India (RBI) governor YV Reddy, decided to play safe in his third quarter review of the monetary policy on Tuesday, than feel sorry later. But RBI has thrown enough hints to softening interest rate shortly, though did not touch any of the key rates.

“RBI has provided a sufficient number of explicit hints that it expects banks to voluntarily reduce interest rates on both deposits and loans – despite having itself kept a rate cut in abeyance,” said Bhaskar Ghose, Managing Director and CEO, IndusInd Bank.

Sunil Mehta, Country Head and CEO – AIG India said, “The deposit growth is strong and the incremental credit deposit ratio is low. Banks have surplus funds, which should bring down borrowing rates for the corporate and retail customers. This does not require change in the policy rates.”

But, will the banks oblige? “It is unlikely that banks will lead the way in reducing lending rates in general, unless deposit rates first show a downward trend,” Ghose added.

HDFC, which is dragging its feet on slashing rates, but extending its Diwali offer on fresh loans at 10.25 per cent, decided to drag along further for now.

For the banks to start their cycle to bring down the rates on their own, they have to begin with cutting deposit rates, which will bring down their cost of funds. Then only slashing of lending rates will follow. But the million dollar question is, who will take the lead/ bell the cat.

However, there is a respite from tight policy stance seen over the last four years, though total reversal in stance is at a stone’s throw, according to analysts. If CRR was hiked again it would have been a clear signal for raising rates again.

“There are no major changes expected in the interest rate levels in the short run. RBI will wait for incoming economic evidence to conclude a perceived slowdown if any, to cut rates,” said Devendra Nevgi, CEO and CIO, Quantum Mutual Fund.

The other important factor that attracted the attention of economists and investment specialists is the announcement of focused credit dispensation for employment-oriented industries at a time when the economy is expected to grow at 8.5 per cent. “This is where many emerging economized have failed. This is expected to put the economy on an equitable and sustainable growth path.