Monetary Transmission: Lenders may not reduce deposit rate

A research note by Nomura says that the transmission from policy rates to lending/deposit rates has never been one-to-one. “At a time when transmission is partially clogged,this suggests that lending rates are unlikely to fall much,” it says. Aggregate bank credit growth slowed to 16.3% year-on-year as on February 22 from 19.4% as on March 30,2012,due to sluggish investment demand and raised risk aversion because of the deterioration in public sector banks’ asset quality over the past few quarters.

Similarly,Crisil in a note to client says the 25 bps cut in repo will not immediately translate into a proportionate reduction in lending rates. “Banks are likely to cut lending rates gradually and that too selectively for some portfolio,” it says. During April-February,Crisil notes that the median base rate reduction of 10 banks as 20 bps,while the RBI reduced the repo rate by 75 bps and the CRR by 75 bps during the period.

Analysts say as long the deposit rate remains at the current level of 8.75 to 9.25,it makes sense to park money in long maturity,especially in 5-year deposit and get tax deduction under section 80C of the Income tax Act.

For existing home loan borrowers it is a tricky situation. If the transmission takes a longer time in a particular bank,then it makes sense to switch to another bank offering a lower rate and save on the interest. Profitability of banks are also expected to come under pressure due to reduction in policy rates as well as increased competition. Crisil forecast a 10-15 bps decline in net interest margins during the course of the year.