The Reserve Bank of India (RBI) let pass an opportunity to cut the repo rate on Thursday, keeping it unchanged at 8.5% going into Budget Day, as inflation reared up for the first time in five months.
Recent growth-inflation dynamics have prompted it to indicate that no further tightening is required and that future actions will be towards lowering the rates, the apex bank said in a statement post its monetary policy review.
It noted, however, that inflation risks remain notwithstanding the deceleration in growth, which will influence both the timing and magnitude of future rate actions. Headline inflation weighed in at 6.95% in February, increasing for the first time in five months.
Bankers said the move was largely along expected lines and puts off a much awaited round of rate cuts by weeks, if not months.
The market now expects the RBI to announce a cut in the April monetary policy, a move that will encourage banks to start lowering lending rates, albeit with a lag.
“If a repo rate cut happens in April, then may be after a month from then, banks will cut their lending rates,” said Ram Sangapure, general manager- retail banking, Central Bank of India.
RK Bansal, executive director, IDBI Bank, concurred. “Banks may not cut lending rates immediately. The deposit rates need to go down first and for that liquidity condition has to improve and inflation should come down.”
According to Bansal, banks will not be able to slash the deposit rates if inflation remains high, and in that scenario, lending rates may also take time to start falling.
High lending rates have impacted credit growth in the banking system.
“Given slowing credit growth, we expect the RBI to reverse its policy stance to protect growth, especially as inflation peaks off. We expect RBI to cut repo rate by 125 basis points through FY13 in a largely frontloaded policy action,” said Praveen Agarwal, Deepak Agrawal, Siddharth Goel and Namesh Chhangani of Enam Securities said in a report dated March 1.
Lending rates are expected to come off 150 basis points, while deposit rate is likely to pick up with a lag due to high nominal interest rates, said the Enam analysts. Historically, falling policy rates have boosted credit growth and banks have been a big beneficiary, they said.
The repo rate has increased 375 basis points since March 2010 and banks have passed on much of it by hiking lending rates 300-325 basis points so far.
