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Difficult to cut interest rates soon: Banks

May 03, 2013 03:03 PM IST Business Business

Mumbai/ New Delhi: Big banks say it will be difficult for them to pass on the benefit to customers even though the Reserve Bank of India (RBI) cut repo rate by 25 basis points on Friday even though the cash reserve ratio was left untouched. The banks say RBI's move is not enough to cut interest rates for customers.

The State Bank of India (SBI) said there is not much scope for rate cuts while ICICI Bank added that a cut in lending rates will mainly depend on cost of funds. Similar sentiments were echoed by Axis Bank and Punjab National Bank (PNB) with both refusing to take a call on cutting interest rates any time soon.

"Until cost of borrowings comes down, transmission will be difficult," said Axis Bank even as PNB said that it is "too early to say worst is behind us".

The cut in repo rate by 0.25 per cent on Friday is the third time since January and it now stands at 7.25 per cent, lowest since May 2011. The CRR remains at four per cent. The RBI also pegged India's economic growth for the 2013-14 fiscal at 5.7 per cent.

But the RBI also warned that there is little room for more rate cuts and taking a cue from the statement, most banks quickly said that they cannot cut rates further in the near future.

RBI Governor D Subbarao clarified that the current situation doesn't leave RBI with more space for easing rates. "Overall the balance of risks stemming from RBI's assessment of the core inflation dynamics gives little space for further monetary easing. RBI will endeavour to actively manage liquidity, to re-enforce monetary transmission," said Subbarao.

Meanwhile, Prime Minister's Economic Advisory Council Chairman C Rangarajan said that the scope of further rate cuts depended on how inflation behaves. "Whether there will be a cut or not depends upon how the inflation tends to behave. I think the five per cent inflation rate which as mentioned is the goal towards which the RBI would like to move," said Rangarajan

When asked about the RBI Governor's statement on limited scope of further monetary easing, Finance Minister P Chidambaram also said that RBI has announced a liberal policy and future will depend on inflation. "Inflation trend will decide further action of RBI. Let us accept this for now and see what future holds," he said.