BofA-ML said improvement in bank liquidity may pull down lending rates by another 50 basis points by March 2013
Mumbai: Within a couple of days of the country's largest lender State Bank of India (SBI) announcing an interest cut, Bank of America Merill Lynch (BofA-ML) on Thursday said lending rates will come down further by 0.5% before March end, reports PTI.
"Improvement in bank liquidity should pull down lending rates by 50 basis points (bps) by March atop the 25-75 bps done," its India economist Indranil Sen Gupta said in a note.
SBI cut its minimum rate of lending or the base rate by 0.25% on Tuesday, citing the cash reserve ratio (CRR) cut the previous day by the Reserve Bank of India (RBI) by a similar quantum and ease in liquidity.
BofA-ML expects the RBI to cut the CRR by a further 0.5% in its third quarter policy review on 30th October, the note said, adding, the central bank may also infuse an additional liquidity of Rs1 lakh crore by March through open market operations (OMOs).
This is likely to push up the deposit growth to 16% from the present 14%, it said.
However, the softening of rates will not result in an uptick of credit growth as the rates will still continue to be elevated, the note said. "High lending rates will likely continue to soften loan demand to 15% by December from the current 16.7%," it added.
The lending rate cuts are, however, key to economic recovery, Sengupta noted, adding growth will pick up in the March quarter to the 6.5% from the current 5% once the lending rates come down by up to 0.50%.
Welcoming the recent reform measures like diesel price increase and foreign holding liberalisation, the BofA-ML note said.
Though they will help boost sentiment, the real impact of those will be felt in the medium-term, it added.
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