The Reserve Bank of India (RBI) appears to have landed an ace with its decision to kill the liquidity deficit that has persisted in the system for years now. There are some lingering concerns over how deftly RBI will be able to implement the strategy, which requires it to infuse cash through a mix of foreign exchange operations and bond buys. However, the broad consensus is that RBI’s move is a smart one.
The new strategy, as the RBI governor articulated after the monetary policy announcement, has been brought in to ensure that the broader economy benefits from the policy rate cuts announced. As is widely known, banks have failed to pass on the full extent of previous rate cuts and have blamed tight liquidity for this. RBI has now addressed those concerns.
So will bank lending rates start to fall now?
Most analysts say they will. But there is still a debate on how soon rates will fall and how far they will drop. Bankers have been cagey. They have all welcomed RBI’s move, but none have gone on record to say that rates will come down any quicker now. They are waiting to see liquidity conditions actually improve and are also assessing how far they can drop their deposit rates without hurting deposit growth (which has fallen to a 63-year low) further. That is not to say that rates won’t fall. They probably will, but eventually rather than immediately.
The quantum of the fall may also not be as large as some expect. Citi Research, for instance, in a note on 6 April, said the marginal cost of funds-based lending rate (MCLR) will fall 10-25 basis points from here. One basis point is one-hundredth of a percentage point.
