MUMBAI (Reuters) - State-run Indian banks are likely to give in to a government directive and lower lending and deposit rates within the next few days after the RBI made a deeper than expected cut to its policy rate on Tuesday.
Banks had been reluctant to cut their lending rates despite a reduction in their reserve requirements, saying tight cash conditions were keeping deposit rates high and deposit growth low, and are unlikely to match the full 50 basis point cut in the policy rate.
The Reserve Bank of India has lowered banks' cash reserve ratio (CRR), the share of deposits they maintain with it, by 125 basis point since January, releasing 800 billion rupees into the banking system.
However, a severe cash crunch on lagged government spending and large dollar sales by the RBI pushed the liquidity deficit to more than double the central bank's stated comfort zone this year, reducing banks' ability to cut lending rates.
Following the muted response from banks to its CRR easing, the RBI cut its policy interest rate by a deeper-than-expected 50 basis point this week, in part to spur faster monetary policy transmission and to give a stronger signal to banks.
As of Thursday afternoon, only state-run Punjab National Bank and IDBI Bank had announced cuts in their lending and deposit rates.
"If the RBI cuts rate, the implication is banks will pass it on to their customers. It looks a part of it may be passed on," said A.K. Bansal, executive director at state-run Indian Overseas Bank.
Still, banks were reluctant to do so before the government's directive to reduce lending and deposit rates immediately.
The Economic Times newspaper reported on Thursday the government had ordered state-controlled banks to lower lending rates immediately. Bankers confirmed the order to Reuters.
"They asked us to relook on this issue. We are reviewing," D. Sarkar, chairman and managing director at state-run Union Bank of India, told Reuters.
"Whatever instruction is coming from the ministry and the Reserve Bank, we will consider," he said.
Sarkar said Union Bank's board will meet on Friday and an announcement on cutting rates is likely on Saturday or Monday.
Cash conditions have improved since the end of March, with banks' repo borrowings from the RBI easing to around 1 trillion rupees this week from a record high 1.96 trillion rupees on March 26.
Bankers expect cash conditions to ease further on government spending at the start of the new fiscal year in April. Also, typically subdued loan demand in the first half of the fiscal year will reduce pressure on banks to lure investors with higher deposit rates.
After the RBI's policy meeting on Tuesday, the country's largest lender, State Bank of India, said it will cut lending rates only on some loans that have high interest rates.
As of April 6, bank deposits grew 14.3 percent year-on-year, while credit grew 18.7 percent, data showed.
Reporting by Shamik Paul; Editing by Aradhana Aravindan and Tony Munroe