State Bank of India was the first off the block to impress the regulator on Tuesday by reducing its base rate, forcing private sector peers HDFC Bank and ICICI Bank to follow suit as they took heed of RBI governor Raghuram Rajan’s stern message to ensure transmission of monetary policies.
State Bank of India lowered its base rate by a token 15 basis points — from 10% to 9.85%. HDFC Bank lowered its base rate by 15 bps to 9.85%, while ICICI Bank cut it by 25 bps to 9.75%, the lowest in the industry now.
Base rate is the minimum rate at which a bank can lend. One basis point is one-hundredth of a percentage point. SBI’s new base rate is effective from April 10, while HDFC Bank’s will come into effect from April 13. ICICI Bank said its existing floating rate customers will get the benefit of the new rate from April 10, while new borrowers will get it from July 1. HDFC Bank and ICICI Bank have also reduced deposit rates by 25 bps for medium-term deposits of up to Rs 1 crore.
“The policy transmission is what the RBI and government both are looking forward to. Indian banks’ net interest margins (NIM) are one of the highest in the world and this cost of intermediation also needs to come down,” said Ashish Vaidya, DBS Bank India’s executive director and head of trading and asset liability management. Banks were initially hesitant to reduce lending rates, saying they are forced to keep deposit rates high to compete with postal savings, which offer over 8%.
RBI on Tuesday kept the benchmark repo rate unchanged at 7.5%, given that there had been very little transmission from the previous rate cuts since January. “We are not looking at a specific number. We want to facilitate the process of transmission,” Governor Raghuram Rajan said, after announcing RBI’s monetary policy stance.
“I do see an environment where credit growth is tepid, banks are sitting on money, and their marginal cost of funding has fallen, they can borrow at 7.5%, there is plenty of liquidity in the market. So at some point the competitive pressure will tell. As it is, corporates are borrowing directly from market. I have no doubt this will happen. If it happens sooner, it is better for economy,” Rajan said.
Many expect RBI to cut the repo rate by another 50 basis points at least this year. It has cut the repo rate by 50 bps since January 15. “We continue to expect the RBI to cut the benchmark rates by 50 bps over the remainder of 2015, with the timing contingent on the actual transmission of its past policy actions to lending rates and incoming data, particularly on upside risks to inflation,” rating company ICRA’s group CEO Naresh Takkar said.
Source: http://articles.economictimes.indiatimes.com/2015-04-08/news/60943028_1_base-rate-25-bps-repo-rate
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