RBI rate slash: Will banks slash rates now

On Monday, RBI announced a 25 basis point cut in CRR (cash reserve ratio) to make it 4.25%. However, the other key policy rates were kept unchanged. The move is expected to pump in about Rs. 170 billion in the Indian Banking system as banks now will have more cash with them to do their business. While as immidiate reaction to the news, stock market zoomed up, the bigger question is that whether the banks will pass on the benefit of eased out liquidity to their customers?

Mushtaq Ahmad, Chairman, Jammu and Kashmir Bank shares his view, “ With a cut in CRR, a bank like us, which lends heavily in developing regions like J&K, can pass on the benefit of lower lending rates to our customers. It will not only help in widening our lending basket to sectors like SMEs, agriculture, but also deploy quality credit in productive areas outside the state. We will certainly attempt to improve our short to mid-term lending volumes.”

For other banks as well, the news of CRR cut is going to be an opportunity to increase the volume of their lending. Specially, in the corporate lending portfolio, where sectors like infrastructure and capital goods are waiting for any relaxation on the interest rates front. In the last one and a half trading session, benchmark BSE BankEx has added over 400 points. Banking stocks are on the buying radar of most analysts.

However, much will also depend on whether further rate cuts are to follow or not. Seeing the current situation, it seems difficult that any further rate cuts will take place unless inflation softens any further. Aneesh Srivastava, CIO, IDBI Federal Life Insurance asserts, “Government has yet to take actions to address supply side bottlenecks which is one of the reason for inflation.”