Rate cut or not, bank lending rates to stay soft

Opinion is divided on whether the Reserve Bank of India (RBI) will cut rates when it unveils the last monetary policy of the financial year on February 8.

While economists say the central bank will hold and let liquidity take care of the rates, others say RBI may cut rates taking advantage of the lower food prices and the pause signalled by the US Federal Reserve.

Bankers say they have taken the cues and reduced lending rates to spur growth, and now it's the turn of RBI to signal lower rates by trimming the repo rate, or the rate at which it lends to banks.

Arundhati Bhattacharya, chairman, State Bank of India, told DNA Money, "SBI is now ahead of the cycle. We have cut rates by 2% as compared to the 1.75% cut by RBI. So a repo rate cut is expected."

However, the economic research department of SBI says there will be a pause.

The gradual rise in oil and food prices is another factor worrying many economists.

Sougata Bhattacharya, economist, Axis Bank, said, "We are expecting a pause as RBI will want to see the trajectory of the oil prices and food prices in the coming months. Last year the food prices were down due to the demonetization impact. Now with all those external factors waning off, the food prices are likely to reverse."

While others say this may be the last chance for RBI to act so it may cut the rate. Lower food prices in November and December give them hope for a 0.25% cut in interest.

Ananth Narayan, head - financial markets at Standard Chartered Bank, said, "RBI may cut rates by 0.25% on February 8. But I think we are at close to the end of the rate-cut cycle though. Interest rate differentials have already narrowed cannot see too much of room below."

The consumer price inflation coming down both in November and December which has improved chances of RBI meeting the 5% target in March 2017.

Deutsche Bank said in a report, "Indeed, the daily food price tracker and price trend of other key items seems to suggest that CPI inflation for the month of January will ease further to 3.2%, with core CPI (excluding food, fuel and transport) remaining steady at 5.1%. Even after the base effect turns negative from February, CPI inflation will likely rise to 4.5-4.6% by March 2017, which should provide the central bank adequate comfort."

The banks are also unlikely to reduce rates further unless there is another push from the central bank as the deluge of deposits in the banking system is slowing, as depositors withdraw their money and credit growth continues to be muted.

According to RBI data until February 3, the deposits of banks had risen Rs 12.7 lakh crore, or 13.9%, over last year to Rs 105 lakh crore against a 10% rise reported last year, while the credit growth has remained muted at 5% with the total outstanding bank credit standing at Rs 74 lakh crore. But as long as the cash restriction remain, RBI may also think it is worth playing safe by keeping the liquidity surplus for lower lending rates, something which the central bank has been undertaking for the past few months.