Mumbai: In an indication that the interest rate cycle may be beginning to turn back, public sector bank Union Bank of India on Thursday cut its minimum lending rate by 10 basis points (bps).
This is the first rate cut by any bank in over two-and-a-half years, since before the Reserve Bank of India (RBI) began increasing its policy rates to tame inflation.
Although largely symbolic, analysts expect other banks as well to begin trimming their lending rates.
Overall, RBI has hiked its policy rate by 525 bps, and banks have responded by hiking their lending rates by 250-350 bps. A basis point is one-hundredth of a percentage point.
After raising interest rates 13 times since March 2010, RBI in its latest mid-quarter policy review on 16 December said it will not only pause the rate increases but will reverse it if economic growth slows.
“From this point on, monetary policy actions are likely to reverse the cycle, responding to the risks to growth,” RBI said on 16 December. Following this, banks said they, too, may halt rate increases.
Union Bank’s minimum lending rate, or base rate, now stands at 10.65%, lower than that of most public sector banks, but much higher than that of State Bank of India, the country’s largest lender, which has a base rate of 10%.
Union Bank chairman and managing director M.V. Nair said the cut is largely symbolic, but there was a case for reducing rates. “Advances growth in the system is subdued and with inflation coming down, RBI has also indicated that the rates may come down. Given this dynamics, we found a case for a cut in rates,” Nair said.
Credit growth in the banking system is slowing. In the fortnight ended 2 December, bank credit grew 17.7% year-on-year against 23.1% a year earlier. Loan growth is slowing because companies are not borrowing from banks after the cost of money rose significantly following RBI’s rate hikes.
RBI itself has acknowledged that its rate hikes have slowed investment demand in the country and that is hurting growth. In fact, banks had lobbied RBI to go slow on the rate hikes, according to bankers who took part in meetings with RBI officials. In this scenario, RBI will probably start cutting rates from the first quarter of the next financial year and banks will have to follow suit, economists say.
Analysts expect bank lending rates to decline soon.
“The rate cut (by Union Bank) is not too early. It was required,” said Rajesh Tanna, an analyst at Bonanza Portfolio Ltd, a local brokerage. “Other banks will follow this rate cut in the coming days.”
M.D. Mallya, chairman of Bank of Baroda as well as the Indian Banks Association, said his bank will wait and will take a call in early January.