Mumbai, Oct. 30: The impact of the cut in the Cash Reserve Ratio by the Reserve Bank of India (RBI) will be offset by higher provisioning for Indian banks, the head of industry body Indian Banks’ Association (IBA), K.R. Kamath, said on Tuesday.
Earlier on Tuesday, the RBI left interest rates on hold but cut the cash reserve ratio for banks, defying pressure from the government to lower rates for the first time since April.
Kamath, who is also the chairman of state-run lender Punjab National Bank, said higher provisioning is likely to impact average net profit of banks by 3 percent in this fiscal year.
“When you translate it into an immediate impact, what happens is that the provisioning is required to be done in this quarter. That is going to be a hit on this quarter, and will just try to look at it before we answer your question of EMI and how much the customer gets benefited,” he said in Mumbai.
Leaving the policy repo rate unchanged at 8 percent was in line with forecasts in a Reuters poll. But rate cut expectations had grown after India’s finance minister on Monday outlined a plan to cut the country’s hefty fiscal deficit, which is a concern of the central bank.
ICICI Bank Managing Director Chanda Kochhar said the new development would not lead to an immediate drop in interest rates.
“Over a period I think there has to be some softening on the entire interest rate regime, but the 25 basis point reduction on CRR is not going to lead to an immediate reduction in interest rates,” Kochhar said.
Finance Minister P. Chidambaram appeared disappointed with the outcome of the central bank meeting, as were investors, who pushed bond yields and swap rates higher and stocks lower.
Unusually, Reserve Bank of India Governor Duvvuri Subbarao gave fairly explicit policy guidance, saying the central bank might ease policy in January to March, the final quarter of the fiscal year, when it expects inflationary pressure to ease. That implied it will not cut rates at its next review on December 18.
The central bank has said it expects inflation-which hit a 10-month high of 7.8 percent in September-to rise before easing in the final quarter of the fiscal year.
Investors, companies and the government have been clamouring for a cut to interest rates to boost the economy’s flagging growth. India’s interest rates have been on hold since April even as many other central banks cut rates, and remain some of the highest among major economies. (ANI)