After a surprise rate cut of 25 basis points by the Reserve Bank of India's (RBI) monetary policy committee in the first week of February, the interest rates remain unchanged for borrowers of home, car and other loans. While transmission of interest rates always takes time, there are other factors that are coming in the way of softer interest rates. Here is why?
Deposit rates are still high
For interest rates to come down, the deposits rates have to fall drastically. There is not much downward movement in deposit rates. In fact, Kotak Bank recently reduced its fixed deposits rates from 7.0 per cent to 6.75 per cent for maturity between 180 days to 270 days. But many small finance banks are offering as high as 7.5 per cent for more than 180 days. There will certainly be pressure on banks to keep the savings and fixed deposit rates high as there are many new banks, which are willing to offer high as their business model supports higher lending rates (micro finance kind of loans).
The rising credit-deposit ratio
Of late, the credit deposit ratio is on the rise. It touched a high of 79 per cent in the year 2012 and subsequently it was on the decline. One and a half years ago, the credit deposit ratio was at 73.3 per cent. This has now moved to a high of 78 per cent in February this year. The credit deposit ratio indicates how much a bank lends out of its deposits. So a rising CD ratio indicates that the banks are lending more out of their deposits. If the lending growth continues, the banks will be under pressure to raise more deposits.
The pressure from the government's small savings schemes
The government's small savings rates are still ruling high. This encourages people to park their money in government than in banks. Take for instances, the PPF interest rate is at 8 per cent. The 5-year NSC (National Savings Certificate) offers 8 per cent annually. The Sukanya Samriddhi offers 8.5 per cent annually. For the overall interest rates to fall in the economy in the longer run, the government savings rates have to gradually fall.