Rate cut speculation caves in

MUMBAI, JULY 24: The Reserve Bank of India is likely to defer a decision on lowering interest rates until inflation trends and money mark...

MUMBAI, JULY 24: The Reserve Bank of India is likely to defer a decision on lowering interest rates until inflation trends and money market liquidity conditions become clearer, bankers said on Friday.

quot;Increasingly, traders are getting the feeling that the rate cut may not be forthcoming right now and prices have fallen across all maturities,quot; said a bond dealer at a private bank said.

Rumours that the Reserve Bank of India RBI would cut its key bank rate from 8 per cent and, or, banks8217; cash reserve requirement CRR from 10 per cent drove bond prices up during the week. Forward dollar premiums also fell on the news.

The speculation was sparked by inflation8217;s drop to near 20-year lows, which raised inflation-adjusted real interest rates. Some of the froth has since subsided. Long-dated government securities had risen around 30 paise 0.3 rupee over the week, but fell back around 10-15 paise on Friday morning.quot;Inflation is a statistical phenomenon and people may be reading too much into one figure,quot;said a top banker. High inflation rates last year also provide a bigger base on which current rates are measured, which helped bring down headline year-on-year rates.

Year-on-year inflation measured by the wholesale price index fell to 1.83 per cent in the week ended July 3 from 2.03 per cent the previous week and compared to 8.15 per cent a year ago. But annualised inflation for the current financial year is higher around five per cent.

quot;The point is whether banks are in a position to cut lending rates. When the RBI announced cuts in CRR in the April credit policy, hardly a handful of banks cut their prime rates and then by only 50 basis points,quot; the banker said.

State-run banks, which account for over three-quarters of the banking industry8217;s total deposits and advances, are handicapped by a high level of non-performing assets NPAs or sticky loans which require heavy provisions.These banks are particularly wary of any drop in lending rates as it will hit their revenue streams from which NPAprovisions have to be made.One way to maintain spreads is to reduce deposit rates in tandem with lending rates but fears depositors may take their money elsewhere is inhibiting most bankers from doing so. quot;A cut in CRR makes more sense,quot; said the chairman and managing director of a large state-run bank.

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quot;It reduces our cost of funds as CRR deposits get only three percent interest from RBI and also releases money which we can deploy more effectively elsewhere,quot; he said. Other bankers differed and said any release of funds at this stage, when corporate demand for credit is not high, would only lead to bank funds being invested in government securities.

Latest central bank data shows bank investments in government bonds grew Rs 22,556 crore 5.21 billion in the current financial year to touch Rs 24,530 crore on July 2. Bank advances grew only Rs 3,367 crore in the same period. The first half of the April-March fiscal year is referred to as the slack season, when demand for funds is lower.