RBI may need to inject further ‘2 lakh crore to let rates transmit
Excess liquidity often cools overnight and short-term G-sec yields, which in turn forms the basis for corporate borrowing costs.
Although the Reserve Bank of India had announced liquidity measures to infuse `1.45 lakh crore in mid-December, this may not be enough as these infusions overlap with advance tax payments estimated at `2-2.5 lakh crore and drain funds from the banking system. Secondly, any intervention from foreign exchange could result in withdrawal of rupees from the banking system.
The RBI most likely stepped in to prevent excessive depreciation of the rupee and on December 3 it crossed 90 per $ for the first time. Average system liquidity stood at `1.68 lakh crore in November and `2.63 lakh crore in December so far, according to Reserve Bank of India data. According to IDFC First Bank, liquidity was around 0.8% of NDTL in November.
“I think deposit rates will fall so sharply and there is little chance of them falling immediately. But as the RBI starts adding more liquidity to the system, it should gradually reduce deposit rates. It is important for the RBI to keep liquidity at a comfortable level, i.e. 1% of NDTL (Net Demand and Maturity Liabilities). If this happens, policy rate cuts will eventually be reflected in deposit rates as well,” Treasury governor Shailendra Jhingan said. at ICICI Bank, he told ET.
Jhingan expects the RBI to provide additional liquidity support of `1.5 lakh crore without foreign exchange intervention. Gaura Sen Gupta, chief economist at IDFC First Bank, expects ‘1-2 crore’ support through OMOs and swaps. It sees liquidity flow of Rs 1 lakh crore from foreign exchange operations and foreign exchange leakage in Q4.
Axis Bank’s head of treasury said they will watch the market reaction before reducing deposit rates. “We will see how the market reacts. Assets will re-price, liabilities will see re-pricing. So yes, there will be an impact, but it also depends on how the liquidity in the system performs in the last quarter of the year, where you generally tend to chase deposits,” Neeraj Gambhir, head of treasury at Axis Bank, told ET.
However, Ashwini Kumar Tewari, MD at State Bank of India, India’s largest bank, told ET on Friday: “Deposit rates have already come down and from our point of view we also want to look after the interest of our depositors. Of course, our asset-liability committee will meet and decide, but the scope for further reduction in deposit interest rates is limited.”
Since February, when the interest rate cut cycle began, fresh deposit interest rates decreased by 92 basis points to 5.57% as of October, while unpaid deposit interest rates decreased by only 24 basis points to 6.78%. On the lending side, interest rates on new loans fell by 76 basis points to 8.64%, while outstanding lending rates rose by 56 basis points to 9.24%, RBI data showed.
