RBI Credit Policy: Not much scope to cut deposit rates, says SBI

Banks are not yet sure of passing rate cut benefits to their customers. Immediately after the RBI mid quarter policy review on Monday, India's largest lender the State Bank of India (SBI) ruled out any scope for reduction in deposit rates, which are generally followed by lending rate cuts.

"Since this is a no-cut policy that does not give us much scope for reduction either in the lending rates or in the deposit rates. There is no scope for reduction in deposit rates because there is a certain stickiness caused by the fact that you have the floor set with the government saving schemes and our deposit rates are quite low," Hemant Contractor, MD & group executive, (international banking), SBI told CNBC TV18 in an interaction.

The Reserve Bank of India (RBI) maintained status quo by not cutting the (repo) policy in its mid quarter policy review on Monday. The central bank had however, cut by 25 bps on its annual policy on May 3.

Meanwhile, Bank of Baroda chairman S S Mundra hinted at some possibility for deposit rate cut subject to some conditions.

"Going forward, if there is a room where we can have a relook at the deposit rates, there would be a possibility for us to look at a wider reduction rather than the sectoral reduction that we have been doing in any case," he said.

Below is the verbatim transcript of their interview on CNBC-TV18

Q: Do you expect a rate cut on July 30?

Mundra: If we read the Reserve Bank of India's statement when they were talking about the durability of inflation, it was clearly towards consumer price index (CPI) because wholesale price index (WPI) as well as the core inflation seems to be within the comfort zone. Within CPI also, if we further break and look at the core CPI inflation then that is where the problem is, it is about food and fuel.

It would be too early to guess that what will happen on July 30, but there are two-three factors that will determine if the progress of monsoon is good and with that if there is an expectation on the food article side the supply constraint and there could be moderation of inflation. The recent measures taken to contain the current account deficit (CAD), if they start reflecting in the overall CAD position and also the fuel price movement globally, these three factors as they evolve over the period, would largely determine as to what is going to happen on July 30.

Recently finance minister has done a detailed deliberation and the point coming out states that in the past while the transmission may not look ditto in comparison to the repo rate reduction and based rate reduction, but through the sectoral action the banks have passed on the benefit to the different segment of the economy

Q: From now to July 30, should we expect anything from the banks on the deposit rate or the lending rate front?

Mundra: If I look from April 1, 2012 till today and if I put a data base point on most representative small and medium enterprises (SME) segment the effective rate has been reduced almost by 116 bps as against 125 bps reduction in repo almost full transmission and same is the story with retail.

A lot would be determine our ability to do something on the deposit rate. Attempts were made in the industry to reduce deposit rates in recent past and it ultimately translated into a large flight of deposit. So, we have to take care of the depositor's expectation.

Going forward from now till July 30, if there is a room where we can have a relook at the deposit rates, there would be a possibility for us to look at a wider reduction rather than the sectoral reduction, which we have been doing in any case.

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Q: We are seeing a seminal fall in WPI inflation especially in the non-food manufactured products where it is down to 2.4 percent. Do you think this will impact depositors' psyche that they will start responding positively, will not fly away even when you cut deposit rates? Or do you think they will be guided only by CPI and food inflation and therefore these non-food and WPI numbers are not going to impact depositor psyche?

Mundra: There are two factors to it. One, when you are talking about a general depositor the thing which is very much close to him or her and which is well understood will be the CPI. The components of WPI or core inflation would not be appreciated to that extent by ordinary depositor of a bank.

The second, there are certain instruments that are in the market and are acting as a floor. If a small saving scheme is at 8.5 percent then it also at somewhere some point of time it works as a floor and that is why the room for the banks to reduce the deposit rate to a substantial extent is rather limited. With the attempts that we have made in the recent past, a flight of deposit was seen.

That is a point where we are standing at this point of time. However, I will reiterate that the transmission, the whole question of transmission, we have to look in a little wider aspect whether the rate of interest structure as it is prevailing today, whom it is hurting whether it is hurting the existing borrower or preventing the prospective borrowers from brining a project. To my mind, both things are not completely true.

Existing borrower as I did mention, to the various segment a substantial transmission has already taken place and if you look at the data, the real effective rate of interest to them compared to few years back adjusted to inflation even today is less than what they were paying earlier. As far as prospective projects or prospective borrowers are concerned, there are many other factors which might be weighing in the mind much larger than the rate of interest.

Q: Would you maintain that depositors' psyche is so governed by CPI and food inflation that even if the repo rate were cut you will not be able to cut deposit rates because depositors are not accepting it?

Mundra: If there is a room available to the banks to reduce the overall cost of funding and if CRR can become little more productive for us, there would be a room. At the same time after the good monsoon if there is a visible softening or the expectation on the CPI, there would be a room available and some room has been available as we entered into new financial year which has enabled us to give some clear transmission to the retail segment.

In case of Bank of Baroda, we have given significant transmission of rate of interest to home loan borrowers and not only to prospective borrowers, but to the existing one also. Ultimately, you would agree that all this translates into an impact on the profit and loss (P&L) and everything has to be taken into account when we are talking about the whole gamut of rate of interest.

Q: What is your thought, do you think there will be room for you to cut deposit rates or lending rates at all given that this is a no-cut policy?

Contractor: Since this is a no-cut policy that does not give us much scope for reduction either in the lending rates or in the deposit rates. There is no scope for reduction in deposit rates because there is a certain stickiness caused by the fact that you have the floor set with the government saving schemes and our deposit rates are quite low. So, if we were to reduce them further, we run the risk of losing deposits. That sets the floor for any kind of reduction that you set on the lending rate as well.

The actual rates that are determined by each bank would depend on its cost structure. There could well be a case where some bank might feel that there is a case for reduction in the interest rate, so that could happen. But speaking of our bank, I do not think there is much of a scope.

Going back to earlier point about the tone of the Reserve Bank of India (RBI) in their policy announcement about the durability of the inflation being under control, I think there is some cause for optimism in the sense that we had a good monsoon. The start has been good and from all accounts it is pointing to a normal kind of a monsoon scenario.

With regards to imported inflation; commodity prices all over the world have become quite soft because of the general slowdown. Sharp rupee depreciation has occurred because of the exodus of funds out of the emerging markets (EMs). So assuming that this is just a temporary phenomenon and if the slide in the rupee is arrested, we should be able to keep even the imported inflation under control. So these are some good signs. Who knows, going forward in July, we might see some reduction coming from RBI.