MUMBAI: The impact of Reserve Bank of India’s decision to cut its repo rate on the credit will be minimal in the short run, according to Fitch Ratings.
The RBI last week cut its key rate at which it lends to commercial banks. The quarter percentage points cut signals a decline in interest rates.
“The rate cut is expected to only have a modest effect on Indian banks,’’ the credit assessor said. “The banks are likely to lower lending rates due to the decision, and lower borrowing costs will provide some breathing space for highly levered corporates and sectors which have struggled with interest coverage amid slowing growth over the past several years. However, the extent to which this would have a long-term positive effect on bank asset quality remains uncertain.’’ Most banks have stayed away from announcing any immediate cut in either deposit or lending rates.
The Union Bank of India and United Bank of India were the only two banks to snip their lending rates, and bring them close to the bigger competing banks.
Almost all larger banks have not reviewed their rates so far. The State Bank of India chairman last month said any rate cut would also hinge on a pickup in credit demand, which remains muted at around 10 per cent.
“The extent to which the RBI will have more room to cut interest rates depends on domestic and external factors including inflation expectations, and commodity and food price growth,’’ Fitch said.
“Whether the government presents a robust fiscal consolidation strategy and continues implementing structural reforms to ease supply pressures, particularly in the infrastructure sector, also are likely to influence future RBI decisions.’’
India’s high public debt burden and deficit have been a long-standing key weakness for its sovereign credit profile.