Source: Financial Express, Aug 03, 2017
Mumbai: Despite the Reserve Bank of India (RBI) trimming the repo rate by a widely-expected 25 basis points on Wednesday, borrowers may not get much relief as not too many banks may lower loan rates. “I don’t think there is much scope for reducing lending rates much further. At SBI we are low enough and have already dropped rates by 175-200 basis points,” State Bank of India chairman Arundhati Bhattacharya said. The head of a leading private sector bank too believes there is little room for a cut in loan rates. “We are largely done, because it might not be possible to cut deposit rates further,” the CEO said.
Most economists believe chances of a further cut in the in the policy rate are slim unless consumer inflation meaningfully undershoots the RBI’s headline projection of a little over 4% in Q4FY18 (excluding the house rent allowance impact) from a series low of 1.5% in June 2017.
Sonal Verma, chief economist at Nomura, observed in a note that given expectation of both growth and inflation rising over the next six to 12 months, a prolonged pause was expected.
“We do not expect any further reduction in the repo rate this fiscal,” DK Joshi, chief economist at Crisil noted. However, Indranil Sen Gupta, chief economist at Bank of America Merrill Lynch believes there could be another cut of 25 basis points in December given the low inflation, persistent output gap and falling imported inflation.
Leaving its earlier growth projection for GVA at 7.3% year-on-year for FY18 unchanged, RBI governor Urjit Patel red-flagged the need to revive private investments and clear infrastructure bottlenecks and work on the affordable housing scheme, for which states needed to clear projects quickly.Meanwhile, the RBI said it would reconsider the current loan rate mechanism which did not seem to be working effectively enough. Apart from reviewing the marginal cost of funds-based lending rate (MCLR), the central bank will also explore ways to make the base rate less rigid, holding out promise for borrowers who have not seen any meaningful fall in loan rates. But bankers are not clear about how the MCLR could be linked to a market-determined benchmark.
Unless both the loan rate and deposit rate were linked to benchmarks, it could be challenging they said.
Between January 2015 and now, the RBI has lowered the repo rate by 200 basis points from 8% to 6%. While the MCLR, introduced in April 2016 and meant for new borrowers, has come off sharply, banks have been reluctant to drop the base rate. Though lower lending rates may not spur demand for fresh loans, as several other factors are stalling investment, a cut in the base rate would come as a breather to existing borrowers.