Rajan goading banks to cut rates signals surprise easing unlikely

BloombergNew DelhiWhile Indian central bank Governor Raghuram Rajan isn’t done cutting interest rates, analysts say he’s unlikely to spring a third intermeeting surprise.Rajan kept the Reserve Bank of India’s repurchase rate at 7.50% on Tuesday and said he will wait for commercial lenders to pass on the unscheduled cuts in January and March to customers and watch inflation before easing further. Australia & New Zealand Banking Group and FirstRand see reduced chances of a cut before the June 2 review.The “RBI has kept the door open for further easing but has made this largely contingent upon banks reducing lending rates to transmit past rate cuts,” Devika Mehndiratta, a Singapore-based economist with ANZ, said in a report. “We continue to expect another 50 basis points in easing, with risks tilted to just one more 25 basis-point cut.” Only about seven out of 47 banks responded to Rajan’s calls to revive credit growth by lowering lending costs and none has matched the 50 basis point reduction in the policy rate this year. The rest refrained, citing surging bad loans and sliding profitability and said the two rounds of monetary easing had failed to bring down funding costs. The three-month interbank rate was little changed last quarter at 8.64%.“Deposit rate cuts are hitting us on one side and therefore we cannot take a hit from the lending side,” Arundhati Bhattacharya, chairman of State Bank of India, the nation’s largest lender, said in an interview in Mumbai on Tuesday.“So the question of cutting lending rates becomes very difficult.” State Bank on Tuesday cut its base rate, below which it can’t lend, by 15 basis points to 9.85%. It pays 8.50% interest on one-year deposits to lure funds away from offerings such as the government’s 8.40% on small savings programmes. The S&P BSE Sensex index of stocks has gained more than 27% in the past 12 months.ICICI Bank cut its base rate by 25 basis points to 9.75%, the lender said in a statement on Tuesday. HDFC Bank plans a 15 basis-point cut, the Press Trust of India reported, without saying where it got the information.While banks have to lure depositors with higher rates, credit growth at a five-year low damps interest earnings. Loans increased 9.52% in the 12 months through March 20, the least since October 2009.Profitability, measured by the return on assets in the banking system, fell to 0.81% in the year ended March 2014, the lowest since at least 2007, RBI data show. Stressed assets, which include bad loans and restructured assets, are set to rise in the next 12 months, further eroding earnings, according to India Ratings & Research Pvt., the local unit of Fitch Ratings.“There has to be enough credit demand for banks to be able to reduce lending rates and at the moment this eventuality appears to be some distance away,” Arun Tiwari, Union Bank of India chairman and managing director, said in an interview on Tuesday. “The rate curve is definitely moving lower but lending rates will depend on a mix of demand and cost of funds.” While the accommodative stance of monetary policy will be maintained, Rajan said further easing will depend on incoming data and transmission of previous cuts. The RBI will issue guidelines shortly to encourage banks to change how they calculate lending rates so they are more sensitive to the policy rate, he said.“Banks are sitting on money, so to speak, and the marginal cost of funding has fallen. The notion that it hasn’t fallen is nonsense,” Rajan told reporters in Mumbai on Tuesday. “So, at some point, the pressure on the banks, the competitive pressures, will tell.” Royal Bank of Scotland Group says the RBI may frontload rate cuts to help commercial lenders pass them on to customers.Rajan will lower the repurchase rate by as much as 50 basis points by the end of September, RBS economist Gaurav Kapur predicts. “The next rate cut in my opinion will nudge banks to start cutting lending rates,” Mumbai-based Kapur said by phone on Tuesday. “Further rate cuts combined with past ones will help drive yields lower.” The yield on benchmark 10-year bonds rose one basis point to 7.80% as of 9:40 am in Mumbai yesterday, the highest since March 16, data compiled by Bloomberg show, while the rupee fell 0.1% to 62.3050 a dollar. Swaps are pricing in about 50 basis points of cuts in India’s policy rate by the end of 2015, the steepest reduction after Turkey among 14 emerging markets tracked by HSBC Holdings.