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Lending rate cut to boost deposits, not credit growth: BofA-ML

Last Updated: Tuesday, February 5, 2013 - 21:16

Mumbai: Bank of America-Merrill Lynch (BofA-ML) Tuesday said the recent lending rate cut by RBI will not give the much-needed leg-up to the tepid credit growth, but deposits will pick up momentum from next month.

In a note, BofA-ML India economist Indranil Sengupta pegged deposit growth picking up to 15-16 percent by March on the CRR (Cash Reserve Ratio) cuts/OMOs (Open Market Operations) and base effects but loan demand is likely to come off on high lending rates.

"We expect the RBI to cut CRR/carry out more OMOs to ease liquidity going forward. It should cut policy rates by 25 bps each on May 3 and in June. This should bring down lending rates by 25 bps now and 75 bps in FY14 atop 50 bps since March 2012," Sengupta said.

On deposits he said: "It should pick up to 15-16 percent by March from the current 13.3 percent on the CRR cuts/OMOs and base effects. But loan demand will likely continue to come off on high lending rates."

About the high liquidity deficit, he said this is because RBI's forex intervention has sucked out the rupee from the system.

The RBI will bring in an additional Rs 18,000 crore by implementing the CRR cut effective the fortnight beginning February 9. This will help contain liquidity deficit at Rs 70,000-1,00,000 crore in February-March, Sengupta said.

He said so far RBI has sucked out USD 35 billion worth rupee liquidity from the market through forex intervention.

"We estimate that it needs to inject about Rs 2,10,000 crore, or USD 40 billion of reserve money a year, via CRR cuts, OMOs and forex purchases, to generate 16 percent M3 growth to fund 7.5 percent growth," Sengupta said.


First Published: Tuesday, February 5, 2013 - 21:16
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