There's a limit to lowering India's interest rates, says SBI chairman
Going beyond threshold to heighten asset-liability mismatch issues
State Bank of India chairman Rajnish Kumar said that banks cannot lower interest rates beyond a threshold due to asset-liability mismatch issues.
"We can't lower the interest rates without lowering the interest rate for depositors and there is a threshold below which we cannot reduce the interest rate for deposits," he said at the FICCI's 92nd Annual Convention, titled 'India: Roadmap to a $5 Trillion Economy'.
On transmission of monetary policy, there has been constant nudging from the Reserve Bank of India to pass the reduction in repo rates by the whole amount to make the retail loans cheaper for consumers in a big push for consumption. This theory is not bought by commercial banks, who argue if they do 100 per cent transmission, then they will have no margin and will have to lower the deposit rates.
This may see a flight of depositors from banks and also small savings rates are higher than the bank deposit rates which will make PSU bank deposit rates further unattractive.
RBI governor Shaktikanta Das has been aggressively pushing for transmission of rates and has held multiple meetings with banks on the issue.
After the introduction of the external benchmark system, most banks have linked their lending rates to the policy repo rate of the central bank.
Against the cumulative reduction in the policy repo rate by 135bps during February-October 2019, transmission to various money and corporate debt market segments ranged from 137bps (overnight call money market) to 218bps (three-month commercial papers of non-banking finance companies).
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