Indian Banks not ready to cut lending rates,despite rate cut by RBI

Only three of India's 45 commercial banks have cut base lending rates since the Reserve Bank of India's rate cut on January 15, 2015. The failure to pass on the rate cut to businesses and consumers has both diluted the impact of monetary policy and weakened the push by the government to quickly unlock more credit and spur investments as the economy struggles to recover from its slowest growth rates since the 1980s.

Banks feel that they cannot lower loan rates despite the official rate cut because cash conditions are tight, and money markets are little changed since the cut, but RBI insiders see that as more an excuse to protect profit margins.

Bankers say the average funds the RBI provides the market has been steady at around 1 trillion rupees ($16.2 billion) a day since the repurchase (repo) rate was cut by 25 basis points to 7.75 percent.



The rate cut has had little impact in financial markets. The interbank overnight cash rate, a key measure of cash conditions that tends to track the repo rate, has remained around 8 percent despite the rate cut.Furthermore, 3-month wholesale deposit rates have held near 8.50 percent and the one-year wholesale deposit rate has risen 10 basis points to 8.60 percent.

According to reuters, RBI will eventually have to inject more funds, if it continues easing monetary policy. Bank of America-Merrill Lynch believes the RBI will need to inject around $49 billion in new money to the banking system during 2015/16 (April-March) if lenders are to lower lending rates enough to meet the brokerage's projections for a recovery in credit growth to 17.5 percent in the next fiscal year.