A day after the Monetary Policy Committee (MPC) decided at its first policy review to reduce the benchmark repurchase rate by 25 basis points to 6.25 per cent, domestic rating agency ICRA has said that with the indication that real interest rates (the differential between the key lending rate and inflation) may need to be lower than 1.50 percent given prevailing global scenario of negative rates, further easing by the Monetary Policy Committee (MPC) can't be ruled out.
ICRA expecting the rate-easing cycle to continue thinks that banks will cut lending rates although bond yields may not soften further. It expects additional open market purchases of government securities of Rs 50,000-60,000 crore are likely in Q3 FY17, as the Central Bank remains committed to transitioning to a neutral structural liquidity deficit. Accordingly, further softening from current levels is likely to be limited.
ICRA, however, estimates that banks’ 6-month and 1-Year Marginal Cost of Funds-Based lending rate (MCLR) has reduced by 10 bps and 5 bps respectively in Q2 FY2017. The subdued profitability of the PSU banks, which had restricted transmission of past monetary easing, remains an area of concern. Nevertheless, the comfortable systemic liquidity, recent (albeit modest) reduction in various small savings rates and the increasing wedge between the MCLR and money market rates, does provide some room for banks to lower their lending rates.