Banks may not be able to pass on the benefit of the Reserve Bank of India's (RBI) 25 basis points rate cuts without impacting the already slowing deposit growth, said a top banker.
Reacting to RBI's decision announced Tuesday, Indian Overseas Bank's (IOB) chairman and managing director M. Narendra referred to the widening current account deficit that poses a threat for inflation control.
"It will be, therefore, a challenge for the banks to pass on the benefit of the rate cut to push growth and consumption demand without impacting the already slowing deposit growth," he said in a statement here.
The RBI in its third quarterly review of the monetary policy for the current fiscal cut repurchase rate, or the interest on short-term borrowings by commercial banks, by 25 basis points to 7.75 percent. The reverse repurchase rate, or interest on short-term lending, also stands lowered by 25 basis points to 6.75 percent.
This measure will lower the cost of borrowings for commercial banks. If it is passed on to customers, it has the potential to bring down interest rates on loans taken by households and commercial sector.
In another move, the cash reserve ratio (CRR), or the money commercial banks have to retain in the form of liquid assets in proportion to their deposits, has also been lowered from 4.25 per cent to 4 percent. The move is expected to unlock Rs.180 billion for the banking sector.
According to Narendra, the cut in CRR and the release of Rs.180 billion will will provide adequate funds to the commercial sector for its expansion plans and new ventures.
"With the government not going for additional borrowings, the full benefit of the CRR cut will flow to business," he said.
Narendra said the RBI shifting its prolonged focus on inflation management to addressing growth risks has guardedly reduced the policy rates by 25 basis points.
"Growth-inflation dynamics in the current quarter will decide whether the regulator will follow this up with further cuts," he said.
According to him, the deposit rates and short term money market rates are expected to continue a downward bias.
The bond yields will continue its downward movement and 10 year government securities yield is expected to fall below 7.75 percent before end of March 2013.