Loan interests may come down as banks expected to cut rate amidst post-demonetisation deposit rush: Report

Banks are expected to cut lending rates by 50-75 basis points in April-September if the Reserve Bank stimulates liquidity worth Rs 2,20,000 crore throughopen market operations, says a report.

An open market operation (OMO) is a market operation conducted by RBI by way of sale or purchase of government securities to or from the market with an objective to adjust rupee liquidity conditions on a durable basis.

According to Bank of America Merrill Lynch (BofA-ML), lending rate cuts will cushion the hit from the demonetisation shock in the second half of 2017.

"We expect them to cut effective lending rates by 50-75 bps cut in the April-September slack season if the RBI OMOes Rs 2,200 billion in 2017-18," BofA-ML said in a research note.

Demonetisation has led to a jump in bank deposit as withdrawals are restricted and black money cash is switching to the banking channel.
"After normalisation, however, we estimate the durable accretion to bank deposits at about Rs 2,000 billion," the report said.

Meanwhile, top lenders SBI, PNB, Union Bank and Dena Bank slashed their benchmark lending rates by up to 90 basis points after Prime Minister Narendra Modi on Saturday nudged banks to priorities their lending to the poor and the middle class.

Banks have started lowering their lending rates as demonetisation has led to a surge in deposits.

"Although the market is focusing on the surge in bank deposits, we believe this will not really add to the overall liquidity as it is funded by a drawdown of cash," the report said.

"While respecting the autonomy of the banks, I appeal to them to move beyond their traditional priorities and keep the poor, the lower middle class and the middle class at the focus of their activities," Modi had said.