On rate cut, St’s split down the middle

On rate cut, St’s split down the middle

Economic growth data for the quarter ended June has left economists and analysts divided on the issue of a reduction in key policy rates by the Reserve bank of India (RBI).

Gross domestic product, or GDP, growth for the quarter printed at 5.5%, higher than the 5.3% growth logged in the March quarter.
Some feel this throws water on any remaining hopes that the central bank will cut rates, while others expect a reduction as growth is down from 8% in the June quarter last year.

“Positive base effect in the second half of the year could be a saving grace, but deteriorating trends on services and consumption will likely ensure a 5% handle on GDP even with our expectations of positive agriculture growth of 1.5%. We now expect GDP growth in FY13 at 5.6% annually,” Deepali Bhargava, chief India economist at Espirito Santo Securities wrote in her note on Friday.

Bhargava does not expect the Reserve Bank of India to cut key rates at its monetary policy review on September 17.

Cries for a rate action to spur lending rate cuts by banks and to help kickstart growth have been getting shriller by the day.
However, Morgan Stanley believes banks are not in a position to offer onward lending rate cuts even if the central bank obliged.
In fact, the lenders seem stuck between the devil and the deep blue sea here — unless deposit growth improves drastically, and soon, they would have to try and bring down lending growth, so as to keep the balance.

Call it liquidity management, if you will.

Loan-to-deposit (LD) ratio for the banking system has printed a tad lower at 75.2% in August, compared with 75.3% as of July.
LD ratio is a gauge of the liquidity situation of a bank --- higher the ratio, lesser the amount of deposits and thus lower the liquidity. A lower LD ratio, however, would mean the bank is earning less in interest.

This was because deposit growth improved to 14.3% as of August 10 from 13.8% as of July 27 even as loan growth dropped to 16.6% from 17.2%.

But this is nowhere near enough, Sumeet Kariwala, Subramanian Iyer, Reshma Seth and Anil Agarwal of Morgan Stanley wrote in a note on Monday.

“Even if we assume the same rate of deposit growth (on annual basis) to continue, for LD ratio to remain stable at 75.2%, credit growth will have to decline to 14.7% as of December and 11.7% as of March, respectively,” they noted.

To be sure, inflation, both headline and retail, is widely expected to resume its upward spiral after a blip in July. Making matters worse, crude is also seen trending up.

Bankers concur that propping deposit growth up is easier said than done in the current environment. In fact, with inflation eating into the returns, fixed deposits are finding fewer takers, leaving them with no space to reduce deposit rates.

“Cost of lending is a function of cost of funds, and with the deposit growth already slowing down, how will we be able to attract the depositors if we further cut the rates?” K R Kamath, chairman and managing director, Punjab National Bank, asked on the sidelines of an event on Monday.

Still, there are some willing to wager a RBI rate action is nigh.
“There is a 50% probability the RBI will cut rates in September,” Shashi Kant Rathi, Mumbai-based head of debt capital markets at Axis Bank, the biggest arranger in 2012, told Bloomberg News last week. The likelihood of a rebound in sales of rupee-denominated bonds from a 10-month low rests on the RBI cutting the high borrowing costs, he said.

While banks have cut rates in select segments by 25-50 basis points, the base rates --- or the minimum lending rates --- continue to be high. 
Banks are not willing to reduce lending rates till the RBI signals a course-reversal in interest rates, Kamath had said.