Mumbai, June 17: A 25-basis-point cut in the policy rate by the Reserve Bank of India is unlikely to encourage lenders to bring down interest rates in tandem.

On the eve of the mid-quarter monetary policy review by the RBI, bankers and economists aver that banks are likely to bring down lending and deposit rates only if the apex bank goes in for an aggressive cut in the repo rate, or accompanies it with a reduction in the cash reserve ratio (CRR).

The repo rate is the rate at which banks borrow money from the RBI, while CRR is the portion of deposits that must be kept with the central bank.

“A lending rate cut is unlikely if the RBI were to bring down its repo rate only by 25 basis points. However, there are strong chances of a reduction in both deposit and lending rates in the event of the repo rate being brought down by 50 basis points,” a senior official of a private bank said.

He added that the current liquidity condition would hinder the passing on of the benefits of a repo rate cut to borrowers.

The RBI, on April 17 had, reduced the repo rate by a more-than-expected 50 basis points to 8 per cent. Though many banks had then lowered their base rates, some such as the State Bank of India did not follow suit. The country’s largest bank, instead, went in for selective easing as it cut interest rates on car loans and, more recently, loans to corporate houses and the agriculture sector.

The central bank has so far maintained that the transmission of policy action is more effective when liquidity is in deficit.

According to banking circles, the liquidity situation has improved because borrowing by lenders from the RBI’s repo window has come down over the past weeks.

“In such a situation, banks may not be tempted to bring down their deposit rates and therefore lending rates. However, a reduction in CRR along with the repo could trigger base rate cuts,” a PSU banker said.

In a recent note, Nomura said while monetary policy transmission had lagged the actions of the central bank by a notch, the latter would have to deliver more repo cuts if it was serious about lowering the cost of funds and supporting growth.

“If the RBI is serious about supporting growth, then policy rates will have to be cut much more for the same level of policy transmission to occur,” Sonal Varma of Nomura said.