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Indian banks unlikely to reduce rates until budget

NEW DELHI: Indian banks are unlikely to reduce their interest rates until after the federal budget is unveiled to parliament on February 29, analysts said on Sunday.

Hopes that a reduction in interest rates on some government-run savings schemes announced two weeks ago would spark cuts in bank lending and deposit rates have been dampened as the central bank is expected to keep its monetary policy stance unchanged until the budget, they said.

The federal government cut the interest rate on deposits with the Public Provident Fund (PPF), a voluntary savings scheme, and on post office deposits by 100 basis points from January 15.

Analysts have viewed these rates as references for banks' deposit rates and in turn for their lending rates.

"I think it is now clear that too much was initially read into the PPF and post office rate cuts," said Vasan Shridharan, treasury economist at Standard Chartered Bank.

"We have to remember that these are very long term savings...the PPF is a 15-year scheme, while the bulk of bank deposits are below three years," he said.

Only private sector bank ICICI Bank and financial services firm ICICI Ltd have lowered rates after the government's move.

Analysts said only a signal from the Reserve Bank of India (RBI) could now trigger a review of bank deposit and lending rates but they did not expect any action from the central bank until after the budget.

"The key factor now for banks to cut their rates is a signal from the Reserve Bank of India (RBI) either through a cut in banks' cash reserve ratio (CRR) or bank rate or a combination of both," said Aashish Pitale, head of research at JP Morgan.

"And I personally think the RBI is unlikely to do anything on either front before the budget," he said.

The bank rate -- the rate at which the central bank refinances banks -- is currently eight percent and banks' CRR is nine percent.

The size of government borrowings and its proposed action to trim its high fiscal deficit will be the keys in determining what the central bank does, analysts said.

"There is a strong case for lower interest rates, the ingredients are there...inflation is stable and so is the currency despite a slight blip last week," Shridharan said.

Year-on-year inflation, measured by the wholesale price index, is currently running slightly more than three percent, below India's long-term average of five to six percent.

The Indian rupee has also been stable over the past year and a Reuters poll in early January predicted only a 2.5 percent depreciation against the dollar over the next 12 months. "So the big factor which could convince the central bank to loosen monetary strings will be a tighter fiscal policy from the government," Shridharan said. "There seems to be some hope on that side."

Finance Minister Yashwant Sinha last month said he hoped to introduce legislation to discipline government finances in the budget session of parliament, which starts on February 23.

Sinha and central bank officials have said in the past that lower interest rates are possible only if the fiscal situation improves.

Analysts said the combined fiscal deficits of the federal and state governments, along with the losses of public sector units, is close to 8.0-9.0 percent of gross domestic product (GDP).

Bankers will also continue to be constrained by high transaction costs and provisions towards heavy non-performing assets (NPAs) or sticky loans.-Reuters