Rate cut could have improved market sentiment: SBI

With enough liquidity in the system, lending and deposit rates are likely to fall further

While appreciating the Reserve Bank's move to withdraw the incremental 100 per cent cash reserve ratio (CRR) from the weekend, bankers were, on Wednesday, disappointed by the decision to keep the key rates unchanged.

With enough liquidity in the system, lending and deposit rates are likely to fall further, they said.

In the fifth bi-monthly monetary policy today, the RBI and the MPC unanimously left the repo rate unchanged at 6.25 per cent, contrary to expectation of at least 25 bps reduction.

"I think the rate cut may not have meant anything really materially immediately, in the sense that banks are not really dependent too much on market borrowings, other than the fall in yields, but it would definitely have had a very good impact on the sentiment. So to that extent, I think the market is little disappointed," State Bank of India chairperson Arundhati Bhattacharya told the business channel CNBCTV18.

She said in the near past, there has been massive demand destruction and it is important at this point to get demand back up and for that the economy does need to climb up.

ICICI Bank chief executive Chanda Kochhar said the RBI has maintained stability in monetary policy with a focus on the medium-term inflation targets being sustainably achieved, while continuing to be supportive of growth.

"The policy has maintained an accommodative stance while taking into account global developments and domestic economic conditions," Kochhar said.

Kotak Mahindra Bank's Shanti Ekambaram attributed the surprise move from the MPC to the "uncertain global and local factors, and the RBI will now wait and watch for more trends and data."

According to Bank of India MD Melwyn Rego, "risk to inflation trajectory is the major reason for a pause since base effect for CPI would be unfavourable from December."

"The tone of the policy is a bit hawkish," he noted.

Bandhan Bank chairman Chandra Shekhar Ghosh said, "Many of us were expecting a quarter percentage point reduction in RBI's key policy rate, however, it has adopted a wait and watch approach to see how the inflation trajectory pans out in the coming months."

RBI today also withdrew the incremental CRR effective from the fortnight beginning December 10.

RBI had announced incremental CRR of 100 per cent of the increase in net demand and time liabilities (NDTL) of banks between September 16 and November 11, effective the fortnight beginning November 26.

The move was intended to absorb a part of the large increase in liquidity following the withdrawal of the legal tender status of Rs 500 and Rs 1,000 bank notes.

"The withdrawal of incremental CRR does address some of the concerns. We are very relieved that this additional burden that had come on to us has now been taken away. It, along with the MSS scheme will help banks to manage their liquidity conditions better and bring financial stability to the system," Bhattacharya said.

Kochhar said with regard to liquidity and interest rates, withdrawal of the incremental CRR requirement and the use of other instruments such as MSS to manage liquidity is welcome.

Bhattacharya said as liquidity is very ample, there would be a downward bias on rates and the bond yields will drop.

"Deposit and lending rates are expected to continue to show a downward trend going forward," Kochhar said.

Rana Kapoor of Yes Bank said the status quo policy "is a reflection of the RBI's confidence and conviction that impact of demonetisation on growth is transitory as mid to long term benefits are much higher."