February and March are typically tight liquidity months for the banking system. Demand for funds goes up as banks, companies and the government look to balance their books for the fiscal year ending March 31.
Hence the 25 basis points (bps) repo rate and cash reserve ratio (CRR) cut of the RBI will not immediately translate into lower lending rates of banks or lower deposit rates.
Banks will, in fact, raise deposit rates to improve their liquidity profile, as they would not want to be seen as heavy borrowers from the RBI on the last day of March 2013.
The liquidity situation will ease considerably in April when all the hoarded cash gets released.
That’s when deposit rates will tumble and lending rates get reduced.
In effect, despite the positive sentiment of rate cuts, the next two months will see yields on short-term instruments such as commercial papers and certificates of deposit being pressured on higher demand for liquidity.
However, the markets will pull down yields at the longer end of the curve on expectations of rate cuts in March and on expectations of an easy policy regime in the coming fiscal. The yields on longer maturity bonds will fall on strong demand.