Bank of America Merrill Lynch Economist Indranil Sen Gupta said in a report today that they were more confident that 2017 will see more lending rate cuts, which will cushion the hit from the demonetisation shock. SBI had cut lending rates by 0.90 per cent and a few other banks had also begun cutting rates.

BoAML noted that banks have so far pared their marginal cost of funds-based lending rates (MCLR), which is the cost to the new borrower. It expects them to cut effective lending rates by 50-75 bps in the April-September slack season if the RBI OMOs Rs 220,000 crore in FY18.

Indranil said demonetisation has led to a jump in bank deposits as withdrawals are restricted and black cash money is switching to the banking channel. After normalisation, however, BoAML estimates durable accretion to bank deposits at about Rs 200,000 crore. While the RBI has called off their expected OMO of Rs 45,000 crore to combat this temporary surge of bank liquidity, this has actually resulted in overall M3 contraction of Rs 2,70,000 crore, Indranil said in his report. It is for this reason BoAML believes the RBI will likely resume OMO by mid-2017.

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