Banks may cut retail lending rates. This is thanks to the Reserve Bank of India cutting a key reserve ratio. The RBI, on Tuesday, surprisingly cut the statutory liquidity ratio (SLR), which requires banks to park a slice of their deposits in Central and State government securities, from 24 per cent to 23 per cent.

The SLR cut can enhance liquidity in the system by about Rs 62,000 crore. This has to be seen in the context of deposit growth lagging credit expansion and the need for creating capacity among banks to handle possible liquidity pressures.

Banks are unlikely to cut short-term deposits rates due to competition from liquid schemes of mutual funds, but they could revisit the long-term deposit rates in view of the SLR cut. The central bank, however, left key policy rates, repo rate (the interest rate at which banks borrow funds from RBI) and reverse repo rate (the interest rate at which banks park surplus funds with RBI) unchanged at 8 per cent and 7 per cent, respectively.

In its first quarter review of monetary policy, the cash reserve ratio (a portion of deposits that banks have to mandatorily park with RBI) was also left untouched at 4.75 per cent.

The RBI Governor, Dr D. Subbarao, reasoned that the SLR cut will not only help banks channel credit to productive sectors of economy but also get rid of high-cost bulk deposits. A CRR cut, on the other hand, has an across-the-board impact and would have meant infusing surplus liquidity beyond what is required.

Inflation

Despite the clamour for a cut in policy rates from industry and banks to promote investment and growth, the RBI did not oblige as the primary focus of monetary policy remains inflation control. The RBI has raised the inflation projection for FY13 from 6.5 per cent, as set out in the April monetary policy statement, to 7 per cent.

The SBI Chairman, Mr Pratip Chaudhuri, observed that resources unlocked on account of the SLR cut would largely go to the retail sector as large term-loan proposals are few across banks and working capital demand from good corporates is already low.

“Hence, for a bank like ours, the option is to accelerate retail credit growth. There could be greater competition in retail and this can be backed by a rate cut…So there could be a reduction in retail lending rates,” Mr Chaudhari added.

The SBI Chief does not see a reduction in short-term deposit rates due to competition.

“A short-term deposit rate cut looks difficult as there are fixed maturity plans of mutual funds which offer high interest rates. However, there could be some room to cut long-term deposit rates but that would depend on each bank,” he said.

GDP Growth

The GDP growth projection for FY13 has been cut sharply to 6.5 per cent from 7.3 per cent projected earlier. In this regard, the RBI pointed out that the earlier assumptions of a normal monsoon and improvement in industrial activity did not hold.

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