Persuation seems working when rate signal fails

Persuasion appears to have outscored logic in influencing rate decisions at high-street banks.

About three weeks after Mint Road unexpectedly lowered a key benchmark for broader interest rates, Allahabad Bank Wednesday reduced borrowing rates, just a day after the central bank eased operational curbs on the state-owned lender.

The Reserve Bank of India (RBI) last week urged lenders to soften rates after a 25-basis-point reduction in the repo rate early February failed to make impact. Governor Shaktikanta Das had reportedly urged lenders to pass on the benefit to borrowers during a meeting held on February 22 in Mumbai.

One basis point is equal to one hundredth of one percent.

Allahabad Bank, which exited the prompt correction action-based restrictions this week, has reduced its marginal cost-based lending rate by 10 basis points across maturities effective March 1.

“As a result, home, car loans and other retail loans are slated to get cheaper,” the bank said Wednesday.

ET in its edition dated February 23 reported the possibility of token rate cuts.

Despite RBI’s call, there were still doubts about the ability of banks to lower lending rates when deposit rates remained sticky due to year-end pressure and tight liquidity.

After RBI’s rate cut, State Bank of India was the lone lender to announce a symbolic 5 bps cut in home loan rates even as its chairman Rajnish Kumar said that there was no room for a reduction unless deposit rates were lowered. SBI kept MCLR unchanged while it lowered the mark-up for home loans.

HDFC Bank chief executive Aditya Puri expressed similar concerns.

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In recent years, banks have been slow in responding to RBI’s rate cut moves. Deterioration in asset quality and losses at public sector banks hampered effective credit rate transmissions, preventing an accommodative monetary policy from achieving its objectives fully.

This had prompted RBI to take the dialogue route to nudge banks to lower rates. Das was said to have told bankers to lower rates in an effort to create positive market sentiment.

“Whenever there is a policy rate reduction, it would be RBI’s expectation that monetary transmission does take place. But again, we have to keep in mind that the lending and the fixing of the rate of interest is a function of banks,” Das had said on February 8.



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