The end of rate cuts?

The Reserve Bank of India has finally brought down the repo and reverse repo rates. However, banks are still holding out and are yet to reduce their lending rates in tune with the RBI initiatives. The repo and reverse repo rate will now be 4.75 per cent and 3.25 per cent, respectively.

But is this going to be enough? Or will we see further rate cuts? Economists and market strategists feel there could, indeed, be another round of cuts in the near future, after which the “falling interest rate” scenario may come to an end. The worrying factor till now is the refusal of the banks to act on the apex bank’s initiatives and cut lending rates further.

Since September 2008, repo rates and the cash reserve ratio have come down by 4 percentage points and reverse repo rate by 2.7 percentage points. Yet, the prime lending rates of both nationalised and private sector banks have come down by only 1-1.25 percentage points, indicating that there hasn’t been a trickle-down effect. “Lending rates for banks may ease in second-half of the financial year as banks will begin to reprice their assets,” says Sachchidanand Shukla, an economist, at the Mumbai-based Enam Securities.

So, what’s next? The onus will definitely be on the banks to spur credit growth. An IIFL Institutional Equities report titled “Over to Banks” argues that there is likely to be increased pressure on banks, especially PSU banks, to cut lending rates. Another report by Nomura Financial Advisory and Securities India says the latest reduction in repo rates will “reinforce the scope for the overall interest rate structure to move down.”

Is another 0.25-0.50 per cent cut during the next policy review in July, on the cards? Sailesh Jha, Director, India Asia Economic Research, says there is a good chance of this happening, provided global market conditions continue to improve. But he cautions that it could be the last policy rate cut this fiscal. Morgan Stanley Asia and Nomura Financial Advisory and Securities India expect a similar percentage reduction in the key rates. “The challenge facing the RBI is managing the government’s large market borrowings, keeping bond yields low and ensuring further pass-through of rate cuts to the broader economy,” says Sonal Varma, Economist at Nomura Financial Advisory & Securities (India).

—Rachna M. Koppikar