When senior bankers, including the chiefs of the country’s banks, say lending rates are unlikely to come down even if RBI cuts repo rates by 25 to 50 bps on Friday, it’s time to pause and think. With headline and core inflation easing in March to 6% and 3.4%, respectively, and indications that the government is serious about reining in both the fiscal and current account deficits, there is consensus the central bank will cut the policy rate. However, as both SBI and ICICI Bank chiefs have emphasised, there is little room to drop loan rates because liquidity is insufficient, deposits aren’t coming in fast enough and, moreover, cheaper current and savings accounts are becoming increasingly harder to come by. Unable to offer customers lower rates on deposits, and unwilling to take a hit on their net interest margins (NIMs), banks are looking for a cut in the cash reserve ratio (CRR) to be able to make loans cheaper. Since January 2012, RBI has cut the CRR by 200 basis points to release liquidity to the tune of R1.3 lakh crore and also infused some R2.1 lakh crore through open market operations (OMO), making for a total of R3.5 lakh crore. However, going by the fact that daily borrowings through the liquidity adjustment facility (LAF) have averaged R1 lakh crore in the last three months, it’s evident liquidity hasn’t exactly been abundant, partly exacerbated by high government cash balances—estimated at R80,000 crore—with the central bank.
Despite RBI having cut the repo rate by 100 basis points since January 2012, banks haven’t followed through with matching cuts in loan rates; SBI has cut its base rate by 30 basis points although it has offered customers better deals for select products. If the central bank wants speedy monetary transmission so as to be able to ease the strain on corporate India’s cash flows and arrest the deceleration in growth, it would need to ensure there’s enough liquidity in the system unless, of course, it is able to convince banks to learn to live with smaller margins. For the liquidity deficit to ease, the government needs to manage its cash surplus better, spending more and the pace of deposit growth too needs to pick up—from the current 14-15% levels. Economists estimate that money supply needs to grow by 13-13.5%—from the current 12-12.5%—to support a GDP of 6%; in the absence of better liquidity, it’s hard to see lending rates coming down any time soon.