What made bankers change their mind on rate cut

RBI Governor made it clear they had no option but they were firm in opposing; however, mutual confabulations convinced them that, having made their point, they had to

The message to bankers from the Reserve Bank of India chief Raghuram Rajan was clear. If you don’t cut, it won’t be acceptable to either the public or the political system.

On Tuesday, the bankers' body language was combative even after RBI’s monetary policy review, during the customary press conference afterwards. They were, clearly, not in a mood to cut lending rates, despite Rajan's rap. While RBI had kept the policy rate unchanged, it had passed the buck to banks to cut rates. The latter had not reduced their lending rates despite RBI cutting the policy rate twice since January, by a total of 0.5 percentage points.

By the evening, however, there was a U-turn. Three of the largest lenders -- State Bank of India, HDFC Bank and ICICI Bank -- announced a reduction in their respective base rates.

The chief executives of banks had begun their day with a meeting, with Rajan and all the four RBI deputy governors. This is a customary meet, when RBI explains the policy rationale to banks and takes feedback. Sources at the meeting said there was heat, as some bankers did not agree with proposals such as taking the marginal cost of funds as the main ingredient for calculating the BR. And of course, the contentious issue of monetary transmission.

During the post policy press conference, bankers made no effort to hide their disappointment, though they agreed that interest rates had a softer bias. They said deposit rates should come down before any action could be taken on lending rates. Some also explained that when the policy rate was raised thrice between September 2013 and January 2014, by a total of 0.75 per cent, they did not raise lending rates.

What changed in between? Sources say after the aggressive stand at the press conference, they met again at a management committee meeting of the Indian Banks’ Association. Where, they realised there was no option but to blink.

“The governor had used some strong words. The message was clear,” said a banker who was in the thick of things.

During the meeting at RBI, it was communicated to them that if they did not cut, it would not be acceptable to the public or the political system. “We deliberated on all these points and figured we had no choice but to fall in line,” said another banker.

A former chairman of a public sector bank had another take on the sudden change. “It is likely that it is a mark of protest. They wanted to project that while there was no case for a rate cut, they were doing so under pressure.”

Despite sluggish credit offtake and amid a slack season, banks were not willing to cut rates as it would hurt their net interest margins. These were already under pressure due to a rise in bad loans.

Image: RBI Governor Raghuram Rajan. Photograph: Hitesh Harisinghani/Rediff.com