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Banks (Finance)

RBI Keeps Interest Rates Unchanged, but Banks Are Expected to Pass on Rate Cuts

Strategic Insights

— 2 min read

In a bid to rein in inflation, RBI Governor Raghuram Rajan kept interest rates unchanged, disappointing hopes of sharp reductions during the year. However, his tough message for banks that haven't passed on previous rate cuts seems to have yielded results, with State Bank of India, HDFC Bank, and ICICI Bank lowering rates just hours after the policy announcement. Although Rajan has cut the key rate twice since the beginning of the year, commercial banks had kept lending rates unchanged, citing high deposit costs and liquidity concerns.

Key Takeaways:

  • RBI Governor Raghuram Rajan kept interest rates unchanged at 7.5%, citing inflation worries and the need for transmission of previous rate cuts.
  • Despite Rajan's efforts to ease rates, commercial banks had kept lending rates unchanged, citing high deposit costs and liquidity concerns.
  • State Bank of India, HDFC Bank, and ICICI Bank lowered rates just hours after the policy announcement, in response to Rajan's tough message.
  • RBI is optimistic about growth, bumping up the forecast for the current fiscal year to 7.8% from 7.5% a year earlier, but expects inflation to hover around 5% in the fourth quarter of 2017.
  • Banks are expected to pass on rate cuts, with HDFC Bank's Aditya Puri saying that a base rate cut is dependent on deposit cost and that rates will come down "somewhere between now and June".
  • RBI's policy transmission will take a few quarters, with Rajan expecting the pressure on banks to tell soon, leading to further rate cuts.
  • RBI has forecast inflation to accelerate to 5.8% in the fourth quarter of this fiscal year, while maintaining its target of bringing down inflation to 4% and keeping it in a 2 percentage point band around it.

Statistics:

  • RBI kept interest rates unchanged at 7.5%.
  • State Bank of India, HDFC Bank, and ICICI Bank lowered rates by an unspecified amount.
  • RBI has forecast inflation to accelerate to 5.8% in the fourth quarter of this fiscal year.
  • RBI forecasts inflation to be around 5% in the fourth quarter of 2017.
  • Banks expect the central bank to release more liquidity in the form of a reduction in CRR or by buying dollars from the market.
  • RBI's consumer inflation forecast for the current fiscal year is 4.8%.
  • RBI expects the economy to grow at 7.8% in the current fiscal year.

Sources:

  • Mumbai: Reserve Bank of India Governor Raghuram Rajan (as cited in the article)
  • HDFC Bank's Aditya Puri (as cited in the article)
  • RBI's policy review announcement (as cited in the article)
  • Standard Chartered Bank's Ananth Narayan (as cited in the article)
  • Nomura Securities' Sonal Varma (as cited in the article)

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