Bankers rule out immediate reduction in interest rates

Cut may happen only after banks are comfortable with deposits

Borrowers may not get an immediate reduction in EMIs equated monthly instalments on their home and personal loans even as the Reserve Bank of India announced a 0.25 per cent cut in repo rate on Tuesday.

This is because banks are in the process of assessing the year-end liquidity conditions and await further signals from the RBI in the Annual Policy Statement next month before considering any decision on rates. Most bankers were expecting liquidity infusion measures and at this point,it is unlikely that the 0.25 per cent cut will be passed on to customer,bankers said.

After the quarterly review in January,several banks had slashed base rate and benchmark prime lending rate.

According to bankers,the key for the industry is reduction in lending rates but this would happen only when banks are comfortable with deposits and deposit rates come down. Bank deposits grew at around 12.5 per cent while credit growth was 15-17 per cent with credit-deposit ratios at a high of 78 per cent leading me to believe that banks will not cut interest rates in a hurry, HSBC India Country Head Naina Lal Kidwai said.

Indian Overseas Bank chairman and managing director M Narendra said banks would cut the lending rate when deposit rates,both short-term and long-term,start showing a decline. Base rate may not be cut at this point of time. Status quo will be maintained till the end of March and thereafter the bank would assess the liquidity condition and take a view on the rate cut,he said.

According to Central Bank of India chairman and managing director MV Tanksale,the reduction is on expected lines and it shows that the RBI is supportive of growth. 8230;I cannot say how it is going to shape up in the reduction of the base rate. We will discuss this issue with our ALCO asset liability committee as we have upwardly revised our deposit rates recently, he said.

Immediate transmission before the end of March,I think,will not be possible from the bankers side, Bank of India chairperson and managing director VR Iyer said. Maintaining that the monetary action was on expected lines,Bank of Baroda chairman and managing director SS Mundra said: I dont see any immediate action. But come April or mid-April there would be much clarity on liquidity position.

MINT STREETS ASSESSMENT

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CAD CHALLENGE: The key challenge is to reduce the CAD,which is well above the sustainable threshold. This adjustment will inevitably take time. Financing of the CAD with stable flows remains a challenge.

INFLATION STILL A WORRY: The unrelenting rise in food inflation is keeping headline wholesale price inflation above the threshold level and consumer price inflation in double digits. There is still some suppressed inflation related to administered prices which carries latent inflationary pressures.

GOVT HAS KEY ROLE: Key to reinvigorating growth is accelerating investment. The government has a critical role to play in this regard by remaining committed to fiscal consolidation,easing the supply bottlenecks and improving governance surrounding project implementation.

INVESTMENT REVIVAL: A competitive interest rate is necessary for this,but not sufficient. Sufficiency conditions include bridging the supply constraints,staying the course on fiscal consolidation,both in terms of quantity and quality,and improving governance.

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PRIORITIES: To raise the growth rate,restrain inflation pressures and mitigate the vulnerability of the external sector.

WEAK GROWTH: Indias GDP growth in Q3 of 2012-13,at 4.5 per cent,was the weakest in the last 15 quarters. What is worrisome is that the services sector growth,hitherto the mainstay of overall growth,has also decelerated to its slowest pace in a decade.