Banks welcome rate cut; say will take a call on passing on benefit

Bankers gave a thumbs-up to the third consecutive 25 basis point cut in repo rate by the Reserve Bank of India and said it will boost economic growth. But they also indicated that they would take a call on cutting rates further.

Monetary transmission by banks has been widely perceived to be weak despite the 75 basis points cut in repo rate effected by the RBI in the last three policy reviews.

“The RBI policy decision to change the policy stance to ‘accommodative’ will simultaneously help the financial system to navigate to a lower term structure of interest rates and accommodate growth concerns,” said Rajnish Kumar, Chairman, State Bank of India.

Sunil Mehta, Chairman, Indian Banks’ Association, and Managing Director and CEO, Punjab National Bank, said the change in monetary policy stance is positive for economic growth, banks and markets.

“Already banks have transmitted around 21 basis points of the previous cuts. Given the need for growth, banks would take a call on further rate cuts,” he said.

HSBC economist Pranjul Bhandari said there could be an uptick in GDP growth in the second half of the fiscal to seven per cent due to a pick up in activity as election-related uncertainties fade and liquidity in the banking sector improves. “We expect the RBI to remain supportive, maintaining liquidity at a slight surplus over the next few months. On the margin, this could aid transmission,” HSBC said in a research report.

Crisil said that the rate cut along with the change in stance to accommodative points to the Monetary Policy Committee’s optimism in containing inflation below the target for the rest of the year and the need for the monetary policy to support growth at a time when the fiscal policy remains constrained.

With both growth and inflation seen to be on a downward trajectory, economists said there could be more rate cuts.

YES Bank Chief Economist Shubhada Rao said that with economic growth expected to remain muted, the RBI could go in for another 25 bps cut in the next policy, taking the cumulative monetary easing to 100 bps in the current cycle.

HDFC Bank Chief Economist Abheek Barua said: “…further downside risks to the first half fiscal growth estimates, warranting more rate cuts this year. We believe that another rate cut could be in the offing in August, assuming that inflation risks remain muted, especially the food inflation risk during the monsoon season.”