MUMBAI: After three consecutive rate cuts in 2013, the Reserve Bank of India (RBI) lived up to market expectations of a status-quo in its mid-quarter policy review on Monday, but raised hopes of a rate cut next month with milder statements on inflation. With no change in policy rates, bankers now forecast a dip in loan rates in the July-September quarter supported by a good monsoon.
“While there was no expectation of a rate cut for this month, we stick to our earlier stance that there is scope for a cut in benchmark rates later this year, perhaps even next month,” said Keki Mistry, vice-chairman and CEO of HDFC. He said that although liquidity has improved, deposit rates are yet to come down. “One big worry is the current account deficit and the currency. But as inflation eases, more money will come into bank deposits and banks will be in a position to cut rates,” he said.
Bankers and economists said RBI’s earlier statement that there is “little room” to cut rates – which RBI governor D Subbarao stated twice in the past – was conspicuous by its absence. In its mid-quarter review, the governor merely said that RBI will have to wait for a durable reduction in inflation before cutting rates.
While the governor has been less hawkish on inflation, a new element introduced in the policy statement has been the exchange rate concerns. “The rupee depreciated by 5.8% against the dollar during the current financial year up to June 14. It fell by 6.6% during May 22-June 11 due to sell-off by foreign institutional investors, reflecting risk-off sentiment triggered by apprehensions of possible tapering off of quantitative easing by the US Fed,” RBI said. On Monday, the rupee weakened by 34 paise against the dollar to 57.87 in the interbank foreign exchange market.
Large public sector banks have been citing high interest rates on small savings schemes as a deterrent to bringing down rates on deposits. However, Shikha Sharma, MD & CEO, Axis Bank, pointed out that in the past banks have offered lower returns on deposits even when small savings schemes offered prevailing rates. She said that the cost of wholesale funds has to start coming down before banks can lower deposit rates.
“It is apparent from the communication that while RBI is now more comfortable with the domestic atmosphere that can support monetary easing, it has heightened its risk perception of the external atmosphere. Thus, it mentions its worry on the pass-through effect of rupee depreciation. Further, the apprehension of RBI comes from the fact that there could be a sudden stop and reversal of capital flows from emerging markets, including India,” said Indranil Pan, chief economist, Kotak Mahindra Bank.
“After factoring in the risks to inflation and also the global financial markets, we see a bigger probability for the RBI to stay on a pause in the July policy meeting. We also believe that the chances of an extended pause have increased,” he added.
With data showing that GDP grew at sub-5% in Q4, there is a clear need for a pro-growth stance. But as banks pointed out, it was not absence of funds that was holding back investments in core projects but government clearances.
Also, cutting rates when the rupee is under pressure goes against text book economics which calls for higher interest rates to protect the exchange rate.
The less-hawkish-than-expected statement triggered a rally in government bonds and in the equity markets. But the rupee weakened by 34 paise against the dollar to 57.87 paise in the interbank foreign exchange market.
“With monsoon progressing well and with softening global commodity prices, we expect inflation to continue on its southward journey. This is likely to lead to a situation of ‘durable receding of inflation’ and should pave the way for monetary easing in short to medium term,” said Shyam Srinivasan, MD & CEO, Federal Bank.
Cheaper loans in 2nd qtr?
The fact that RBI did not say there is “little room” to cut rates after stating it twice before has boosted sentiment Bankers see a dip in loan rates in July-Sept quarter on back of good monsoon and an improvement in liquidity CAD and weakening currency remain top worries: If inflation eases, banks can cut rates after more money comes into deposits.