To cut, or not to cut...

With the RBI expected to announce its quarterly credit policy on April 5, the guessing game of whether governor Raghuram Rajan will cut interest rates or not is in full swing. There is some optimism as Dr Rajan said in his last policy he would see what the government did in the Budget; and Arun Jaitley left the fiscal deficit target untouched. Dr Rajan also agreed with banks that they couldn’t pass on the RBI’s rate cuts as deposits were costly and banks were affected by higher interest offered on small savings instruments. This seems a dubious argument as small savings deposits are just seven per cent of total bank deposits. The banks have passed on barely 70 per cent of the RBI’s cuts. One would have expected the banks to immediately announce a cut in lending rates after the government slashed interest rates on small savings like the Public Provident Fund, Kisan Vikas Patra and even the girl child scheme. But there is no action from the banks so far.

All eyes are now on the RBI’s April 5 policy as rate cuts ranging from 25 to 50 basis points are expected after post-Budget developments. Another factor generally seen favouring a rate cut is declining inflation. The wholesale price index is falling every month, and while the consumer price index isn’t falling, its pace of growth has slowed. All this should point to a rate cut and to banks cutting lending rates. Or will they find yet another excuse not to pass on the RBI’s rate cuts.