The Reserve Bank of India, today cut the benchmark repo rate by 25 basis points, while keeping the cash reserve ratio unchanged.
The Reserve Bank of India, today cut the benchmark repo rate by 25 basis points , while keeping the cash reserve ratio unchanged. The repo rate, the rate at which RBI lends to banks, now stands at 7.25 percent. The CRR, which is the portion of the deposits banks have to compulsorily keep with the RBI, stays at 4 percent.
In an interview to CNBC-TV18, MS Raghavan, executive director, Bank of India; Diwakar Gupta, managing director and chief financial officer, State Bank of India; Romesh Sobti, managing director and chief executive officer, IndusInd Bank and Shilpa Kumar of ICICI Bank share their views on the monetary policy.
Will banks cut rates now?
However, most individuals read the repo cuts as a case for banks cutting their base rates. Sobti says that deposit rates precede a cut in base rate. With 75 bps rate cut in the CY13, Sobti says the case for a drop in deposit rates is strong. "A CRR cut would have immediately prompted banks to also cut simultaneously, but now they are going to see the pace at which the cost of deposit falls. Overall, I do see a downtrending happening," adds Sobti.
Reiterating Sobti's view, Raghavan says, "With the inflation coming down, there is a case of passing on, transmitting this rate cut to the customers and we will be looking at it and deciding on it very soon."
With extreme volatility in the currency market, the RBI has asked banks to allocate high risk weights and higher provisioning to un-hedged exposures. However, bankers believe this will have marginal impact on their profitability. According to Gupta, this won't have a large impact on the bank's profits. He says the profits, if at all, will see a decline of not more than 3-4 bps.
"It will obviously mean additional capital to be set aside and to that extent, it will have some effect on the capital adequacy ratio. I don't think the provisioning is going to be very high," adds Gupta, whose views are in-line with Sobti
Future rate cuts?
However, Gupta believes the RBI should start giving precedence to growth and give more significant cuts. "If one looks at the years when we did very well and 9 percent, there was monetary easing and prices were stable, it was only because investments were putting back produce into the economy and we need that as of now," says Gupta.
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