On 15th Jan 2015, the Reserve Bank of India announced 25 basis points repo rate cut. This took financial markets as a surprise. Otherwise adamant RBI’s rate cut was against the tradition in which rate cut is announced only on dates of monetary policy announcement. Many wondered if this was the result of pressure applied by the Finance Ministry on RBI. It is pertinent to note that RBI had taken a stance against prevailing sticky inflation, particularly food inflation and had refused to cut the rate in the past.
The Repo rate cut was greeted all around. The stock market was first to respond. It just zoomed up. Media started flashing news such as “Home, auto loans to get cheaper”, “Great initiative by RBI” etc. Corporate world, particularly banks hailed this decision as path breaking. In brief there was a sense of déjà vu all around. Now that more than 15 days have passed since the rate cut, there was been no material difference to the borrowers, neither new nor existing. While some banks have cut deposit rates post this announcement, none of them have cut lending rates.
After repo rate cut by RBI, many banks had said that they will take a call on lending rate cut after the Asset-Liability Committee (ALCO) of the respective banks met and reviewed the situation. There has been no update till date of the meeting and why banks have not decided on rate cut as yet. It is very obvious that banks are minting money with this rate cut as their own borrowing costs have come down by lending rate are still high.
Nothing explains this better than a report published by Reuters, India which says, “Bank executives insist they cannot lower loan rates despite the official rate cut because cash conditions are tight, and money markets are little changed since the cut, but RBI insiders see that as more an excuse to protect profit margins. The failure to pass on the Jan. 15 rate cut to businesses and consumers has both diluted the impact of monetary policy and weakened the push by the government to quickly unlock more credit and spur investments as the economy struggles to recover from its slowest growth rates since the 1980s.”
Today India needs growth more than ever before. The Indian economy has slowed down considerably and so has been the demand for funds from corporate. Retail borrowers have been borrowing, but with a high rate of interest that has also gone down. For instance, the housing sector has seen a slowdown in terms of sales, if not in terms of prices. In view of all this liquidity is not a concern for banks as they are flush with money. But still banks have decided not to lower the rates. They are probably waiting for more rate cuts to happen.
Amidst all this, it is important that the RBI Governor answer the question on why rate cut has not been passed on to the borrowers. Banks in India operate on higher net interest margin, probably one of the highest in the world. Whenever an RBI hikes repo rate, these banks hike interest rate in no time. Buy when RBI cuts rate, they are ready with all excuses on why they are not reducing interest rate. To influential corporate, they lend at the rate that they demand. This is especially applicable in the case of Public Sector Banks. These loans also become non-performing assets. But for retail borrowers, banks have very little to offer.
I just want to ask Mr. RaghuRam Rajan “Where is my 25 basis point cut and when will I get it?”
By: Vivek Sharma