Within a couple of days of the country’s largest lender State Bank of India (SBI) announcing an interest rate cut,Bank of America Merill Lynch (BofA-ML) today said lending rates will come down further by 0.50 percent before the fiscal end.
“Improvement in bank liquidity should pull down lending rates by 50 basis points by March atop the 25-75 bps done,” its India economist Indranil Sen Gupta said in a note.
State Bank of India (SBI) cut its minimum rate of lending or the base rate by 0.25 percent on Tuesday,citing the cash reserve ratio cut the previous day by the RBI by a similar quantum and ease in liquidity.
BofA-ML expects the RBI to cut the CRR by a further 0.50 percent in its third quarter policy review on October 30,the note said,adding,the central bank may also infuse an additional liquidity of Rs 1,00,000 crore by March through open market operations (OMOs).
This is likely to push up the deposit growth to 16 percent from the present 14 percent,it said.
However,the softening of rates will not result in an uptick of credit growth as the rates will still continue to be elevated,the note said. “High lending rates will likely continue to soften loan demand to 15 percent by December from the current 16.7 percent,” it added.
The lending rate cuts are,however,key to economic recovery,Sengupta noted,adding growth will pick up in the March quarter to the 6.5 percent from the current 5 percent once the lending rates come down by up to 0.50 percent.
Welcoming the recent reform measures like diesel price increase and foreign holding liberalisation,the BofA-ML note said.
Though they will help boost sentiment,the real impact of those will be felt in the medium-term,it added.