RBI doing its bit to ease interest rates, what about banks?

Riken Mehta
moneycontrol.com

Since April last year, the Reserve Bank of India has cut the benchmark repo rate by 125 basis points (1.25 percent), the cash reserve ratio by 75 basis points and the statutory liquidity ratio by 100 basis points.

Repo is the rate at which banks borrow overnight money from the RBI, cash reserve ratio is the percentage of deposits that banks have to mandatory park with RBI, and SLR is the portion of deposits that banks have to mandatory invest in government bonds.

Despite the easing of interest rates by RBI, the weighted average lending rates of banks have declined by less than 0.5 percent, according to RBI data.

Banks have said they are not in a position to reduce lending rates because of tight liquidity in the system. Also, to reduce lending rates, they should be in a position to cut deposit rates as well, which they may not be able to do at a time when the growth in deposits has been slow. 

The chart shows the trend in base rates of SBI, ICICI Bank and HDFC Bank over the last one year, compared to that in the repo rate and cash reserve ratio. Click here for chart

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