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Final Cut

Is the RBI going to slash the bank rate?

Bimal Jalan: Will he bite?

Will he, won't he? Affect a bank rate cut, that is. It's time for the RBI's mid-term credit policy. Just before the RBI Governor Bimal Jalan makes his pronouncements -- awaited so eagerly by banking and business circles -- it would be foolhardy to hazard any guesses.

Going by a random selection of pre-policy opinion, and a look at the way the bond yields have fallen, it looks as though many market players are expecting a cut (of maybe 25 or 50 basis points).

But nobody ever said that the bond market will get it right. Also, it's possible that banks are piling on the bonds only because they have few other avenues that are within their comfort zone of safety -- given the way risks continue to be re-evaluated by the banking sector (this credit fright is not unique to India, it is a global phenomenon, and is closely linked to the worldwide slowdown).

Those who oppose a cut have good reasons to do so: there is sufficient liquidity in the market, and a cut would at best operate as a signal. But even whether a cut will work as a signal -- given the peculiar circumstances -- is not awfully clear. Previous rate cuts have not had the desired impact.

"If rate cuts were expected to stimulate demand in the economy, then the strategy does not seem to have worked,'' says Rajat Rajgarhia, banking analyst at Motilal Oswal, "because repeated rate cuts have not brought in any substantial pick-up in the demand.''

Neither has investment been spurred by the cuts. Project financing has virtually hit rock-bottom, with hardly any greenfield project on the horizon.

Then, there are the worries of bankers to think of. Banks are already under pressure. Unless the regulated deposit rates -- Employment Provident Fund still attract 9.5 per cent, RBI Relief Bonds 8 per cent -- are also brought down considerably, banks are likely to face a huge asset-liability mismatch. Any bank that's lending cheaply but funding itself expensively will soon be broke.

Meanwhile, the whole concept of PLR (prime lending rate) has become more or less meaningless these days. Well-rated companies are getting loans at sub-PLR rates --anywhere between 7.5 per cent to 8 per cent for a AAA firm. But B+ rated companies still continue to get loans at anywhere between 13 and 14 per cent. According to Indranil Pan, Associate Vice President, Kotak Mahindra Capital Company, addressing this would make more sense than lowering the rate for already highly-rated firms (many of which aren't keen to pick up funds anyway).

In risky times, it's the risk-takers who want money, not the super-safety types -- bringing us back to the old Mark Twain saying about bankers (folk who hand you an umbrella after it stops raining). "No rate cut is likely to change the mindset of the bankers," sighs Rajgarhia.

Technically, a cut is possible, so long as inflation is low. But even then, how low can the bank rate go? So even if there is a rate cut, it will probably be a final one. Followed by a lending scramble? Perish the hope. That race, to some extent, has been run.

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