Interest rates are unlikely to go any lower, signals RBI

MUMBAI: The Reserve Bank of India (RBI) on Wednesday indicated that interest rates have bottomed out and yields are inching up in debt instruments as well as deposits, in clear indications that there may not be any rate cuts in the near future.
“Scheduled commercial banks have effected complete pass-through of the policy rate cuts of 115bps (100 basis points = 1 percentage point) to weighted average lending rate (WALR) on fresh rupee loans as well as outstanding loans since March 2020,” the central bank said in the monthly state of the economy report said. WALR is the average rate for loans.
While central banks across the world had slashed interest rates after the Covid-19 outbreak two years ago, those in the developed countries are now beginning to raise rates to tame inflation, which is at the highest levels in several decades. In India, the RBI has kept policy rates steady, arguing that it needs to support higher economic activity.
The monthly report also highlighted that the cost of deposits for banks was gradually moving up. It added that banks have reached an inflection point regarding deposit rates. “With an increase in credit demand and lower accretion in aggregate deposits, banks have started pricing in their deposits at higher rates in recent months. As a result, the median-term deposit rates (MTDR) rose marginally by 5bps since October 2021.”
The RBI’s statement that the pass-through of rates is complete means that banks have used all headroom for lowering interest rates. As the next interest rate revision by the central bank is expected to be a rate hike, it means this is as good as it gets for borrowers.
The good news for depositors is that interest rates may inch up. However, the inching-up of deposit rates may not be very sharp as the central bank has retained its accommodative stance in its monetary policy last week, citing absence of demand pressures as reflected in the output gap and easing of inflation.
The state of the economy report said that the surplus liquidity in the banking system has moderated with the daily net liquidity absorption by the RBI falling to Rs 6.4 lakh crore in the second half of January to February, 2022, from Rs 7 lakh crore from December 2021 to mid-January this year. This was because of the RBI’s liquidity rebalancing through variable reverse rate repo (VRRR) auctions.
“The gradual enhancement in the size of absorption through the VRRR at higher cut-offs has nudged short-term rates upwards,” the report said. As a result, interest rates rose across the outer term money market segment. The 3-month T-bill rate and certificates of deposit (CDs) rate were pulled up towards the policy repo rate, notwithstanding softer overnight rates. At the same time, the 3-month commercial paper (CP)-NBFC rate traded above the policy repo rate, reflecting large issuances.

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