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Bank of America Merrill Lynch Economist Indranil Sen Gupta said in a report that 2017 will see more lending rate cuts which will cushion the hit from the demonetisation shock. SBI has cut lending rates by 0.90 per cent and a few other banks have also begun cutting rates.
BoAML noted that banks have, so far, pared their marginal cost of funds-based lending rates (MCLRs), which is the cost to the new borrower. It expects them to cut effective lending rates by 50-75 basis points (bps) in the April-September slack season if the RBI resorts to open market operations (OMOs) of ₹2,20,000 crore in FY18.
Demonetisation has led to a jump in bank deposits as withdrawals are restricted and black money is switching to the banking channel, says the report.
After normalisation, however, BoAML estimates the durable accretion to bank deposits at about ₹2 lakh crore. While the RBI has called off its expected OMO of ₹45,000 crore to combat this temporary surge of bank liquidity, this is actually resulting in overall M3 (money supply) contraction of ₹2,70,000 crore, Indranil says in the report.
It is for this reason BoAML believes the RBI will likely resume OMOs by mid-2017.
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