Higher CPI, but banks still have scope to reduce interest rates

The gradual rise in the consumer price index (CPI) or retail inflation to 3.36 per cent in the month of July-August is seen as the end of the interest rate easing cycle. There are some experts who are now saying that the Reserve Bank of India (RBI) that tracks the CPI for adjusting its repo rate is likely to press the 'pause' button. But bankers say there is still scope for reducing interest rates marginally, if not substantially. Let's look at how and where:

1. Banks are reducing savings rate

The current and savings  account (CASA), which are low cost deposits, plays a big role in the cost of  funds, whereas the repo rate borrowings generally bridges the short term mismatches. In a post demonetization period, the banks are flush with fund but not enough avenues for deployment. The interest rate in retail products especially mortgages is also not very high. As a result, the banks now reducing the interest rate so that the servicing cost would go down. Many large well established banks have reduced the savings rate from 4 per cent to 3.5 per cent, which will offer scope for cutting  interest rates in future.

2. Fierce competition in retail products

Retail banking especially home loan, car loan, credit cards and personal loans are the only segments that are growing whereas the corporate banking is not showing any growth. In a fierce competition in the segment, the banks are reducing rates to make their product look attractive. In fact, banks like Standard Chartered are making a aggressive pitch to grow retail banking. Similarly, new players like IDFC Bank, Bandhan Bank etc are also entering the retail space where the competition could drive down the interest rates.

3. Refinancing of loans by private sector

The public sector banks are in a deep trouble because of lower profitability, higher NPA provisioning and limited capital. In fact, they are not in a position to pass on the lower interest rates to their existing corporate clients (so as to protect their margins). The private sector banks are already pouncing on the opportunity to make an attractive offer with lower interest rates. The existing good quality corporate will surely see their interest burden going down if they go for refinancing with private banks.

4. The commercial paper and bond market route

With inflows into mutual funds, insurance companies and other investment vehicle are growing in a post demonetization period, the commercial paper and bond market is also seeing lot of activity. In fact, many good rated corporate are using this window to raise money at an attractive rate, which is much below the bank rate.

5. Full transmission of repo rate cut

The RBI has said time and gain that the full transmission of 200 basis points interest rate cut hasn't taken place.  In fact, there is still scope for interest rate cuts. The RBI is already reworking the marginal cost of funding rate because the banks are not transmitting the full rate cut benefit to borrowers. This could also help in rates going down.