Transmission of rate cuts to ultimate borrower challenging

MUMBAI: Repo rate cut has had limited transmission in past actions by the Reserve Bank of India, further limiting the scope for lower borrowing rates for the ultimate borrower.

“ The transmission of rate cuts remains challenging.” Said a report by Nomura Securities. “ Excluding yesterday's 25bp cut, the 75bp repo rate cut has so far only translated into a 30bp reduction in lending rates and a 25bp decline in deposit rates.” It added.

Nomura attributes it to a combination of factors such as credit growth outpacing deposit growth and elevated government cash balances has tightened liquidity, which has forced banks to chase deposits, raising their funding costs and impacting their ability to cut lending rates.

“The transmission from policy rates to lending/deposit rates has never been one-to-one” it said. However, the RBI has historically used stealth tightening (easing) of liquidity conditions to change the operative rate to the repo (reverse repo). Transmission in the current regime (where the repo will remain the operative rate) remains untested, the report notes.

In its policy meeting yesterday, the RBI noted that the space for further easing was "quite limited". At a time when transmission is also partially clogged, this suggests that lending rates are unlikely to fall much. Nomura maintains its below-consensus GDP growth forecast of 5.6% y-o-y in FY14 from 4.9% in FY13.