Banks may face cost, liquidity pressure-Business Line
- RADHIKA MERWIN
The rupee’s slide casts doubts on whether the RBI can meet market expectations of a 50-75 basis point rate cut over the rest of this fiscal.
June 17, 2013:
For once, the RBI’s credit policy did not disappoint the markets.
With RBI Governor D. Subbarao already dropping several hints about the difficulty of cutting interest rates in this policy review, leaving the repo rate and cash reserve ratio (CRR) unchanged did not come as a surprise.
The repo rate, the rate at which RBI lends money to the commercial banks, continues to stand at 7.25 per cent. The central bank’s concern on inflation and current account deficit is even more pronounced now than during the previous review, given the steep fall in the rupee in recent weeks.
The rupee’s slide casts doubts on whether the RBI can meet market expectations of a 50-75 basis point rate cut over the rest of this fiscal.
So where does this leave you?
A WAIT FOR BORROWERS
Borrowers have not had it easy. Banks are yet to pass on even the earlier rate cuts by RBI.
While the RBI has reduced repo rates by 125 basis points in the last one year, base rates, pegged to which banks extend loans, have only come down by 30-40 basis points, offering very little relief to borrowers.
As banks continue to grapple with lower deposit inflows, they may not be able to reduce deposit rates in a hurry.
This suggests that lending rates too may take time to catch up with RBI’s rate cuts.
LOWER TREASURY GAINS
Thanks to the industrial slowdown, the loan growth for banks tapered off to 14 per cent in 2012-13, from 18 per cent in 2011-12. With deposit rates holding high, most banks’ net interest margins have come under pressure.
Higher provision for bad loans has further led to lower profits for banks.
The only silver lining, if at all, has been higher treasury income for banks this year. As rates fell, the 10-year G-sec (government security) has gained 16 per cent over the last year.
Banks continue to hold close to 30 per cent of deposits in G-secs, a good 7 per cent higher than the mandated level.
However, expectations of monetary easing have already led to sharp decline in G-sec yields in the last three months. After falling by almost 80 basis points from April to May, it is moot if they will fall further. Indeed, yields have risen by 20 basis points this month. If yields stabilise, the growth in treasury income may begin to moderate.
Aside from repo rates, the RBI has used other tools in the past to ease the liquidity situation. The cash reserve ratio, is the cash maintained by banks with the RBI. This rate has not been changed from January this year.
LIQUIDITY TREND
The liquidity deficit situation till the month of May remained high. Banks’ borrowing through the liquidity adjustment facility (LAF), which helps them to manage temporary mismatches, remained above RBI’s comfort level of 1 per cent of net demand and time liabilities (NDTL).
But since the beginning of June, there has been some moderation in the LAF borrowing to around Rs 63,000 crore, below 1 per cent of NDTL. Also, the RBI has infused Rs 7,000 crore through open market operations in June.
However, the impact of this on liquidity may be offset by the RBI’s interventions in the forex market. With the rupee weakening, the RBI has been selling dollars intermittently in the forex market for much of the last one year.
But by selling dollars and buying back local currency, the RBI’s interventions in the foreign exchange market tend to suck out liquidity.
For instance, if the RBI were to sell $7 billion worth of dollars in a month, this absorbs around Rs 40,000 crore of liquidity from the system.
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