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Mumbai: A handful of banks cut benchmark lending rates over the past fortnight in response to comfortable liquidity conditions which have also helped bring down interest costs in the bond markets. The paring of rates means that the transmission of the Reserve Bank of India’s (RBI’s) rate cuts has improved, albeit marginally.

Big banks like State Bank of India (SBI), ICICI Bank Ltd, Axis Bank Ltd and Punjab National Bank have dropped their marginal cost of funds-based lending rate (MCLR) by 5-10 basis points (bps) across different maturities since 15 July.

SBI and ICICI Bank pared their MCLRs by 5 bps while Axis Bank slashed it by 5-10 bps across different maturities. On Tuesday, Axis Bank also announced a 15-25 bps cut in deposit rates across select maturities. A basis point is 0.01%. The one-year MCLR at SBI and ICICI Bank is now at 9.10% while at Axis Bank it is at 9.30%.

“There was no rate cut after the April policy but MCLRs have been cut. So the pace of transmission has indeed increased. The liquidity deficit that was hampering the process has changed now," said Ashish Parthasarthy, head of treasury at HDFC Bank Ltd, which cut its MCLR in June and offers a one-year rate on a par with SBI and ICICI Bank.

Banks had been reluctant to cut rates due to the tight liquidity conditions that RBI maintained. In response to the 150 bps reduction in the policy rate since January 2015, banks had reduced rates by only 60-75 bps until April. The central bank cited this incomplete transmission as one of the reasons why it was not keen on cutting policy rates further. Transmission of policy rates into bank lending rates still “remains work in progress", said RBI governor Raghuram Rajan at the 7 June monetary policy review.

What has changed things is RBI’s decision to alter its liquidity strategy and infuse cash into the system. From a high deficit of about 1 trillion, liquidity in the banking system is currently near neutral, with occasional instances of a surplus. A key indicator of this is the sharp drop in banks’ borrowings from RBI’s various repo windows. In July, banks turned net lenders to RBI, parking on an average 10,000 crore daily, from being net borrowers until May. That, together with the new way of computing bank lending rates, which is based on a bank’s marginal cost of funds, has improved transmission of RBI’s rate cuts.

Going by the rates offered by SBI, the country’s largest lender, the benchmark rate is now 90 bps lower than what it was in January 2015.

To be sure, even after taking into account the recent reductions in MCLR, the pass-through of RBI’s rate cuts is not complete.

Bankers concede this and say that factors beyond policy rates such as bad loans and deposit growth dictate the flexibility of lenders to bring down rates further. “On whether full transmission has happened, the answer is no. But there is little scope of loan rates coming down because it will depend on a cut in deposit rates. But the bad loan situation and the need to offer real interest rates to deposits will clog this process," said R.P. Marathe, executive director at Bank of India.

Not everyone agrees. “There is a possibility of rates coming down further over the next few months," said Parthasarthy.

The decision by some lenders to cut deposit rates could point to a further cut in lending rates. Along with Axis Bank, IDBI Bank Ltd also cut deposit rates by 10-25 bps on 28 July. The drop in government bond yields, which have fallen 30 bps since April, could also bring down the cost of funds for banks borrowing in the markets, which in turn would help reduce lending rates.

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