Monday, April 6, 2015

India monetary policy transmission fact of the day

This blog had urged caution against the belief that the RBI's rate cuts will translate into lower lending rates. Business Standard has this evidence from the last cycle of rate cuts,
In the last easing cycle (April 2012-June 2013), a 125 bps cut in the repo rate, along with a 200 bps cut in the CRR (Jan 2012-June 2013) led to a bank-base rate reduction of just 50 bps.
As long as financial repression, by way of fiscal dominance (the high Statutory Liquidity Ratios) and the presence of administered savings alternatives  (NSS, PPF etc), prevails, the transmission of even large repo rate cuts will be muted. The battered bank balance sheets is more sand on the wheels of monetary transmission. In this context, nudging and directing banks to lower lending rates is barking up the wrong tree.

Update 1 (02.10.2015)

From the FT on India's monetary policy transmission problem,
India’s transmission mechanism problem is particularly acute, say analysts, because of banks’ heavy reliance on deposits for funding, a correspondingly low level of interbank borrowing, and a banking system frozen by high rates of bad loans. Deposits make up 78 per cent of the total liabilities of India’s commercial banks, according to ratings group Crisil, compared with a figure close to 50 per cent in the US... Only 1 per cent of SBI’s borrowing came from the open market, meaning policy rate changes reduce the bank’s cost of funds slowly and it would take more than the RBI’s cuts so far for the bank to reduce lending rates further... Credit Suisse reckons about 11 per cent of loans are bad or being restructured, with smaller public sector banks worst affected. That is prompting banks to sit on their hands and margins, afraid to take on new risks ahead of a sustained economic recovery.
And on the 50 basis points cut, FT Alphaville quotes Credit Suisse,
There are three effective rates: the cost of borrowing for banks (repo rate), that for the government (10-yr G-Sec yield), and for the corporates (SBI’s base rate). While the policy rate at 6.75% is now the lowest since 2011 (Fig 2), corporate borrowing rate is nearly 1 pp higher than it was then. Even after SBI’s 40 bp cut, the base rate-repo rate gap is 255 bp now vs 150 bp in 2011. For consumers, particularly in mortgages, where NBFCs gain from lower bond yields and also lower risk weights, rates are already at 2011 levels and may fall further.

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