Interest rate cuts and hikes have been utilised by banks to absorb the upside (lending rate reduction) and pass on the downside (deposit rate cut) to customers, says a study by India Ratings and Research (Ind-Ra).
The transmission is being held back by banks and they have been repricing with a lag only the unfavourable movements in rates, Ind-Ra said. “The policy cycle is being used by banks to their advantage. A study of the last 10 years shows, that in most cases when policy rates have reduced, deposit rates have come down faster and the quantum has also been higher compared to lending rates. The same was also true when policy rates were hiked, where lending rates went up and the quantum was also higher compared to deposit rates,” it said.
While the RBI has cut policy rates since January 2015 by a cumulative 125 bps, banks have cut one year deposit rates by an average 130 bps and lending rates by 50 bps, which includes the base rate cuts in the last one week. “In the last 18 months three-month commercial paper and certificate of deposit rates have fallen by 150 bps. Thus transmission of policy rates has been more through market rates and banks deposit rates in the last one year,” Ind-Ra said.
RBI Governor Raghuram Rajan in the fourth bi-monthly monetary policy statement last week highlighted that “markets have transmitted the Reserve Bank’s past policy actions via commercial paper and corporate bonds, but banks have done so only to a limited extent.”
In certain cases while base rates have been cut, spreads have been increased, netting out part of the benefit to the consumers. Some banks have cut lending rates, to a larger extent for new customers and not as much for their existing ones, while charging them if they wish to switch to the lower rates, it said.
Bankers have sought a reduction in the interest rates on small savings schemes on fears of flight of cash from bank deposits to such schemes. “This has been one of the major impediments for the lending rates being higher believe bankers, however transmission on the deposit side has been fully passed through and in most cases bank deposit rates are lower than rates offered by most small saving deposit schemes like Public provident fund, national savings certificate etc,” Ind-Ra said.
Ind-Ra said there is a clear aberration in monetary transmission which needs to be corrected. This is particularly imperative in the current scenario, to support demand recovery through capex and discretionary spending. “While the central bank is likely to be accommodative, this stance is unlikely to benefit the end consumers unless there is better transmission,” it said.