Deposit rates downgrade due to RBI’s accommodative stance

Experts expect banks to reduce deposit rates due to increased liquidity after RBI adopted an accommodative monetary policy and cut the repo rate by 25 basis points.
Banks are expected to cut deposit rates after the Reserve Bank of India (RBI) changed its monetary policy stance from ‘neutral’ to ‘accommodative’ and cut its policy rate by 25 basis points. Experts say surplus liquidity will speed up the transmission of rate cuts and help reduce banks’ cost of funds.
“We will make adequate liquidity available to the system so that the transmission of policy rate to interest rate is quick,” Governor Sanjay Malhotra told reporters during a post-policy conference. He said the RBI aims to maintain surplus liquidity at around 1% of net deposits.
The RBI had earlier cut the repo rate by 25 basis points in February but the benefits were not passed on to customers by banks due to tight liquidity conditions.
“Banks were not able to pass on the benefits of the repo rate cut by the RBI in February to borrowers as there was a huge liquidity shortage.
Now liquidity is moving into surplus and the governor has said that the RBI is comfortable with a surplus of up to 1% of NDTL (net demand and time liabilities), so now conditions are favourable for banks to reduce rates,” said an executive director of a public sector bank. “We may start seeing a cut in deposit rates from this month.”
Amid high liquidity deficit, banks were struggling to raise funds and shrugged off the cut in deposit rates. Banks faced high liquidity deficits in January, February and March due to RBI’s intervention to protect the rupee and tax-related outflows.
“We expect the monetary policy transmission of the 50-bps rate cut provided from February will start improving money market rates and deposit rates as liquidity conditions remain comfortable,” said Sakshi Gupta, chief economist at HDFC Bank.
He expects liquidity conditions to remain in surplus on average in the coming quarter, although some days may see a deficit due to factors such as tax outflows etc., as currency in circulation is reducing, government spending is increasing and RBI provides dividend payout support.
Liquidity conditions have improved after RBI infused about Rs 7 lakh crore in the last three months. Banking sector liquidity was at a surplus of Rs 1.5 lakh crore as on April 7, compared to a deficit of Rs 1.3 lakh crore on March 27.
Radhika Rao, senior economist and executive director at DBS Bank, said, “While there was no explicit liquidity announcement on Wednesday, recent measures underscore the priority of maintaining balances in surplus, helping the banking system function well and easing policy transmission.”
Call rates have come down significantly for the week ended April 4, as banking system balances remained consistently in surplus for the first time in the last four months.
The April-June quarter is also expected to benefit from a significant dividend payout from the RBI, estimated at over Rs 2 lakh crore. “With the accommodative stance, markets are now convinced that rate cuts are the only way forward.
Transmission will also improve due to liquidity and the fact that the share of EBLR (external benchmark lending rate) loans is now over 60%, which will see the impact of the repo cut being passed on to end-user loan rates faster,” said Debopam Choudhury, chief economist at Piramal Group.