Deposit rates likely to go down first
The good news is that the Reserve Bank of India (RBI) has cut the benchmark rate by 50 basis points. The bad news is that it may wait and watch before cutting rates any further.
Given this, bankers say it may not be easy to provide a respite to customers. Explains R K Bansal, senior executive director of IDBI Bank, “A lower repo rate is only a temporary measure to infuse liquidity into the system. It does not lower a bank's cost of funds, which needs to go down for banks to be able to provide relief to borrowers. But, banks will have to respond to RBI's bold step."
Bankers expect lending rates to go down by at least 25 bps. Some had started before RBI’s annual monetary policy announcement. Like IDBI Bank slashing its floating home loan rates in March, by 25-75 bps over different slabs. For loans up to Rs 25 lakh, the reduction was 25 bps. For Rs 25-75 lakh, it was 50 bps and then 75 bps above Rs 75 lakh.
However, this is just your spread over the base rate coming down, not the rate itself. Again, cost of funds will need to go down for banks' base rate to be brought down. Not that banks have not set the mood for a cut. In past months, some have lowered their base rate by 10 bps, like Union Bank of India in December 2011, Bank of Maharashtra in February and Oriental Bank of Commerce this month. The base rate of banks varies from 10 per cent to 12 per cent.
There are two ways banks could respond to Tuesday's monetary policy. One, cut lending rates to revive credit growth and wait before touching deposit rates, as the growth is also not very encouraging. Some bankers feel deposit rates could be revised if these grow by two-three per cent. Two, wait and watch (on both rates) for some more time. “The last time there was a rate hike, banks did not raise lending rates," says Bansal. Lending rates have been stable since October 2011 and these ranges between 10.75 per cent and 14 per cent.
However, once the big boys like State Bank of India (SBI) and Punjab National Bank cut rates, the system is most likely to react in a similar way. While SBI chief Pratip Chaudhuri said his bank would go for a comprehensive rate cut, ICICI Bank chief Chanda Kochhar said the largest private sector bank would definitely cut both deposit and lending rate but start with deposit rates to bring down costs.
R S Sangapure, general manager-retail at Central Bank of India, expects to see deposit rates coming down before lending rates. “Deposit rates will come off by 25 to 50 basis points for the short and medium term buckets," expects Sangapure. Others expect these to be slashed by at least 50 bps to ease funds. Recently, Oriental Bank of Commerce cut fixed deposit rates on select maturities by up to 0.5 per cent.
SBI officials say car loans are also likely to get cheaper, by a minimum of 25 bps “for substantial respite to the borrower". Automobile loans range from 12 per cent to 15 per cent.