As RBI seen pausing, banks may now cut rates

By Saikat Chatterjee

MUMBAI (Reuters) - The Reserve Bank of India may be near the end of a rate-cutting spree, but commercial bank lending rates look set to fall further as pressure grows to respond to abundant liquidity and near-zero inflation to stimulate credit and shore up economic growth.

The Reserve Bank of India (RBI) cut its key policy rates by 25 basis points on Tuesday and said growth will slow further in 2009/10, as the global slowdown hits the economy harder than expected.

While the RBI has cut its main lending rate by 425 basis points in six steps since last October, prime lending rates of five major commercial banks have only fallen by about 180 basis points in the same period, according to HSBC, limiting the stimulative impact of the central bank moves.

The RBI on Tuesday pressed local banks again to pass on lower rates to consumers, and there were some signs that lenders may follow suit.

After the policy review, ICICI Bank, the country's biggest private lender cut its lending rate by 50 basis points, and State Bank of India said it plans to take a decision to reduce rates after a meeting in the near term.

"The entire policy had that one message, so it is quite a strong signal. Banks' lending rates can fall by 100 basis points," said Sonal Varma, an economist at Nomura.

As the global economy worsened, Indian lenders have grown more cautious about extending new credit. Bank loan growth fell to around 17 percent by end March from a peak of 29 percent in October, with industry and services showing the biggest declines.

With external demand for Indian goods slowing, that has hurt attempts to shore up domestic demand. Exports have fallen for five straight months, industrial output has declined and the central bank has lowered its economic growth forecast for 2009/10 to 6 percent, the weakest in seven years.