The Reserve Bank of India’s (RBI) lower inflation projections for 2018-19, announced on Thursday, suggest an end to the rate-tightening cycle. However, bankers have ruled out any cuts in loan rates immediately, wary of a possible shortage of liquidity as also the need to keep interest rates on deposits at attractive levels so as not to lose out on savings. PK Gupta, MD, State Bank of India (SBI), told a business news channel that even while the RBI was raising rates, banks had not really tinkered with their rates because there was enough liquidity available in the market. “I think liquidity did tighten up a little bit and so some banks started raising rates, forcing other banks to raise rates as well. Liquidity is going to remain comfortable and for the first six months I don’t see the rates moving either way,” Gupta said. A senior private sector banker told FE, “While loan rates are unlikely to be hiked if liquidity is abundant, we are not in a position to trim them right now.” In March, three of the country’s largest banks — SBI, ICICI Bank and Punjab National Bank (PNB) — had raised their marginal cost of funds-based lending rates (MCLRs). SBI raised the one-year MCLR by 20 basis points (bps) to 8.15%, ICICI Bank by 10 bps to 8.3% and PNB by 15 bps to 8.3%. Bankers believe despite the lower inflation trajectory projected, the central bank will wait for more data till August before cutting the repo rates. “The banks too will wait before they act,” the private banker explained.
The central bank has lowered its inflation projections as measured by the Consumer Price Index for Q4 of 2017-18 to 4.5% from 5.1%; to 4.7-5.1% from 5.1-5.6% in the first half of 2018-19 and 4.4% from 4.5-4.6% in the second half of FY19. The central bank said that inflation outcomes in January-February averaged 4.8%, largely reflecting the sharp decline in vegetable prices and significant moderation in fuel group inflation. Although the RBI stuck to its neutral stance and left the policy rate unchanged at 6%, it managed to cheer the bond market with its softer stance. Reacting to the policy, the 10-year benchmark yield on Thursday fell 17 bps to 7.13%. However, the central bank cautioned that several factors are likely to influence the inflation outlook. It added that factors like monsoon, effective supply management by the government, international crude oil prices, domestic demand, impact of an increase in house rent allowance for central government employees could influence the outlook. RBI governor Urjit Patel pointed out that while the inflation for February did turn out to be softer than its projection, much of it was because of the seasonal softening of the prices of vegetables. “However, the MPC (monetary policy committee) looks ahead and we noted that there are several uncertainties around the baseline inflation path, which is why kept the stance neutral and the rates unchanged,” Patel added. He explained that there is uncertainty around the revised formula for minimum support price as announced in the revised budget for kharif crops which may have an impact on inflation although the exact magnitude will only be known in the coming months. “Then there could be the risk of some fiscal slippage from the Union Budget estimates or over the medium term which could adversely impact outlook on inflation. There are also risks in this area from slippages at the level of state governments on account of higher revenue expenditure,” Patel said.