Another 25 bps cut in key policy rate on cards

The Reserve Bank of India (RBI), concerned with the lower transmission of repo rate cuts over the last six months, is set to commence its bi-monthly monetary policy committee (MPC) meeting on Monday, amid expectations of another 25 basis points rate cut.

There has been a growing debate between the banks and RBI over the liquidity – availability of funds in the system. The central bank, on its part, is of the view that there is surplus Rs 1 lakh crore liquidity in the system – which is enough for transmitting the benefits of rate cuts to the end-users. In fact, the Reserve Bank of India Governor Shaktikanta Das, time and again, has been expressing his displeasure to the bank heads over the almost negligible transmission of the repo-rate benefits.

On the other hand, the banks are of the contention that there is a shortage of liquidity in the country for them to cut the lending rates.

According to the data available with the RBI, MCLR stands in the range of 8% at 8.40% during the month of July 2019, 10-25 basis points (bps) higher than 7.9%-8.05% interest rates prevalent a year ago.

Of the 36 public and private sector banks, only six banks – Bank of Maharashtra, Punjab National Bank, Syndicate Bank, United Bank, Bandhan Bank, and Kotak Mahindra Bank – have seen their respective MCLRs below the level that existed in July 2018. The average interest rates of all 36 banks in the previous month stood at 9.01%, 14 basis points (bps) lower than 8.87% a year ago.

What do repo ops say?

The repo rate operations by the central bank revealed that the overall liquidity in the banking system continued to be in surplus during the bygone week at Rs 1 lakh crore. This is the eighth consecutive week wherein the banking system has been witnessing a liquidity surplus. Banks and markets, on the other hand, are battling for the cash reserve ratio (CRR) cut. Estimates suggest that a rate cut of 1% in CRR, from existing 4%, will infuse liquidity worth Rs 1.28 lakh crore into the system.

Many in the central bank believe that it is the current market conditions, which are preventing the transmission. “There is a school of thought that believes that banks are unwilling to lend – given the market condition. So they are keeping rates high,” an RBI official said.

However, according to economists, it is because of slower relative deposit growth that banks are unwilling to transmit the lending rates. The deposits in the past one year have grown by 10.6%, while the advances have increased by 12.2%.

Other than key rates, the central bank’s commentary on growth and inflation front would be keenly watched for.