WILL PRIVATE LENDERS CUT INTEREST RATES

December 1, Dec 01, 2008 (Asia Pulse Data Source via COMTEX) -- IBN | Quote | Chart | News | PowerRating -- Drop in inflation to single digit has given ample room to the Reserve Bank to signal further cut in interest rates, as is being asked by private sector banks which are still holding on to their high credit pricing.

While RBI has injected around Rs 2,75,000 crore into the system through cut in reserve ratios and one of the policy rates, Repo, prompting public sector banks to cut lending rates by up to 75 basis points, private sector banks like ICICI Bank and HDFC have refrained from doing so asking for more cuts from the central bank.

But even if one assumes that RBI holds on to the current policy rates and reserve ratios, will private sector banks not cut interest rates?

Even though refusing to give any directions to these banks, Finance Minister P Chidambaram claimed that they cannot hold on to their existing rates due to competition from their public sector counterparts.

?Public sector banks have reduced their prime lending rates by 75 basis points and extended it to all kinds of loans, like home loans and personal loans. Private sector banks at a meeting with Finance Secretary had said they will also follow the suit. But they have not,? he said.

The Finance Minister added, ?They have their own reasons. I am not commenting on those reasons, but I have no doubt in my mind that competition from public sector banks will force private sector banks to reduce their lending rates sooner than later...it will happen sooner than later.?

However, private sector banks do not seem to be in a mood to so easily adopt a line as is projected by the Finance Minister. Leading housing finance firm HDFC Chairman Deepak Parekh ruled out cut in rates unless cost of funds further go down. ?Our costs of funds are still high. We will reduce interest rates only when costs of funds come down,? he said.

Private sector lender ICICI Bank has already called upon RBI to ease liquidity further to enable cut in interest rates by up to 300 basis points.

?Interest rates are still high. Inflation has fallen to single digit, I think that would give confidence (to the Reserve Bank of India) to roll back or signal drop in interest rate,? ICICI Bank CEO and MD K V Kamath said.

?I think India is in a distinctly different position. Challenge we have is how do we keep confidence in this global situation,? said Kamath. Others also echo this view.

?If the low inflation sustains for a period of two to three weeks, the Reserve Bank might reduce CRR (cash reserve ratio) and repo (repurchase) rates further...this may give room to banks to cut their interest rates again,? Bank of India?s chairman and managing director T.S. Narayanasami said.

UCO Bank chairman and managing director S.K. Goel said: ?This (possible cut) may help banks to cut their BPLRs (benchmark prime lending rates) by 0.5 percentage point in the near term.? Experts say declining inflation has raised hope for a further cut in the short-term lending (repo) rate by at least 50 basis points (bps). One basis point is one-hundredth of a percentage point. ?We see inflation at 5.5-6% by March. RBI can now more aggressively cut rates. I expect (a) 100 bps repo rate cut this year. There could also be a reverse repo rate cut of 50bps,? said D.K.

Joshi, principal economist at Crisil Ltd. ?I expect repo rate cut of 50bps in the near term. There could also be a possibility of 25 bps cut in the reverse repo as well,? said Yes Bank Ltd chief economist Subhada Rao.

So far as further easing of liquidity by RBI is concerned, Chidambaram also saw it coming if inflation continues to decline. ?If the rate of inflation continues to decline, policy rates may also moderate and the bias in favour of growth may deepen... RBI?s policy is now biased towards stimulating growth,? the Finance Minister said.

Planning Commission Deputy Chairman Montek Singh Ahluwalia hoped that inflation would decline further giving RBI a leeway to go for softening interest rates.

Inflation has come down to 8.84 per cent, easing pressure on Reserve Bank to ease money supply to spur economic growth amid fear of slowdown.

Its a moderation in economic growth, Chidambaram reminded journalists and not recession, as a few of them were describing Indian economy this way.

He agreed that India?s growth would moderate in this difficult year, but would still be second-fastest in the world at the rate of 7-8 per cent.

?A recession is defined as two successive quarters of contraction of GDP. I wish to emphasise that India is nowhere near a recession. In our view, we may expect a moderation in growth rate in the current year to a level between 7 and 8 per cent. India would still be the second-fastest growing large economy in the world,? Chidambaram said.

While Germany, Japan, the UK and the Netherlands were into recession, the US and France were expected to slip into this economic cycle shortly, he said, adding, ?We must banish the thought of recession (for the Indian economy),? he said. He also appealed to the media not to use the word recession while referring to the Indian economy.

Indian economy grew by 9 per cent in 2007-08 and by 7.9 per cent in the first quarter of this fiscal. He said the economy would rebound in the second half of 2009-10.

Claiming that farm growth under UPA was far higher than under the NDA, he said the country is self-sufficient in wheat and rice but cannot afford to lower its vigil. He also expected a rich harvest in rabi 2008-09.

However, Ahluwalia expected Indian economy to grow at 7 per cent this fiscal.

?We should be planning for as low as 7 per cent (economic growth rate in the current fiscal),? he said.

RBI has already lowered its projections for Indian economy to 7.5-8 per cent from 8 per cent this fiscal.

With global financial crisis, impacting exports demand for products from India, the Government is trying to perk up domestic demand. For doing that it wants banks to lower interest rates. As such, RBI might go in for further cut in signalling rates, which might prompt even the private sector lenders to reduce lending rates.

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