RBI governor Raghuram Rajan has been a convincing personality as no governor in recent past has been as focused on reining in inflationary expectations as Rajan. No one has been more explicit than him in spelling out the goal of the apex banking institution.
Some of the experts, economists have taken an unusual stand that if the inflation persists the banks should increase the interest rates. Banks stood at a conversation with RBI that the credit demand in the industry has fallen to a greater extent, thus it becomes very tough to drive away the savers as it is very tough to find the borrowers.
But if a fall in credit, among other things, indicates a slowdown in aggregate demand, but it does not makes sense for the banks to keep the interest rates at a high.
Rates on short-term borrowing instruments like commercial papers have dipped this year and if loans don’t grow and more banks slash interest on deposit, it’s a matter of time – may be a few months – when banks start lowering lending rates. A rate cut cycle typically begins with deposit rates, followed by a cut in loan rates as borrowers demand cheaper credit and lenders compete with each other.
There’s something else playing in the minds of bankers’ that if interest rates, and thus bond yields, don’t drop, there will be no treasury profits, not enough funds to make provisions, and little improvement in quality of loan book – a dark spot that that will make future lending more difficult.
