RBI Rate Cuts Not Leading to Lower Costs: Federal Bank's Top Executive

Reduction in policy rate by the Reserve Bank of India is not leading to lower cost of funds because of structural rigidity, according to Federal Bank Executive Director Ashutosh Khajuria.

"By simply cutting rates, it is not helping the end-user to get lower cost of capital. The problem that the RBI is facing is the non-transmission of signals and that problem is in rigidity of structures of some banks, banks are dependent on public deposits," Khajuria told Cogencis in an interview.

Banks' assets are 90% funded by public deposits. If borrowing accounts for only 3-4%, how can a bank be impacted by rate cuts, he asked.

"You have PF (provident fund), NSC (National Savings Certificate), Sukanya (Sukanya Samridhi Account Scheme) all close to 8%, how can a banker quote you less than 7%? He is finding it difficult to get deposits at 6.80%. That's the dilemma," he said.

Despite a cumulative 60 basis points of rate cuts between August and October, the yield on the 10-year benchmark 7.26%, 2029 bond has gone up because of concerns about fiscal slippage, he said.

"I think market is assuming the fiscal gap between 3.80-4.0% of GDP. It (fiscal deficit) may slip, but I think they will manage it below 3.5%," he said.

Khajuria expects a maximum rate cut of 25 basis points in December, but does not rule out a pause.