“The transmission of Friday’s cut to bank lending rates for new loans would take time because the cost of funds for banks is sticky, given the competition for deposits,” said Crisil Ratings senior director Ajit Velonie. “Banks may price this in through a wider spread over the benchmark rate.”
Velonie added that while a rising proportion of floating-rate loans, now accounting for over 40% of the total loan book, is benchmarked to external rates which tend to move in tandem with the RBI‘s repo rate, repricing on the assets side is likely to occur faster than on the liabilities side. This indicates that loan rates could adjust more swiftly than deposit rates.
The RBI’s 25-basis-point cut in the policy repo rate was the first reduction in almost five years, following a series of increases from May 2022 to February 2023. Before the tightening cycle, the central bank had reduced the repo rate by 250 basis points between February 2019 and March 2020. Since then, the repo rate has been maintained at 6.5%.
“Sustained transmission of interest rate cuts may require a surplus liquidity environment,” said Suyash Choudhary, head of fixed income at Bandhan AMC. “From next quarter, as the credit ‘lean’ season begins and core liquidity improves further – including from an expected hefty RBI dividend – the transmission process can commence in a more broad-based fashion.”However, experts have raised concerns about the future liquidity situation. After showing improvement in February 2025, system liquidity is projected to face a deficit of up to ?2.5 lakh crore by the end of March 2025 if the RBI does not implement additional liquidity measures. Such a deficit would put pressure on the transmission process and could delay the full impact of the rate cut on the economy.Confederation of Indian Industry director-general Chandrajit Banerjee expressed optimism about the potential long-term benefits of liquidity easing measures. “The recent series of liquidity easing measures introduced over the past two weeks will aid in the effective transmission of the rate cut to the productive sectors of the economy,” he said.
While the immediate impact of the rate cut on loans linked to external benchmarks is expected to be noticeable, experts suggest that the effect on MCLR-linked loans will take two quarters to materialise due to the typical six-month reset periods on such loans. As a result, banks will likely implement these changes in June or December, with revised rates taking effect in January and July, respectively.
On the deposit side, many ongoing deposits are already fixed, meaning the rate cuts will only affect new deposits. The timing of these changes will depend on the tenor of the deposits, but banks are expected to gradually adjust deposit rates for new inflows as the full impact of the rate cut takes effect.
“We will see an immediate impact on loans linked to external benchmarks,” RBI deputy governor Swaminathan J said on Friday while addressing the media. “In loans linked to MCLR, it will take two quarters for the effect to play out. The existing deposits will be carried on the contracted rate; only the new deposits will see changes. So, monetary policy transmission to deposit rates will also take about two quarters,” he said.
Content Source: economictimes.indiatimes.com