Weak pass-through of RBI policy rate cut remains a concern

The pass-through of RBI policy rate cuts to bank lending rates remains fairly weak. So far, the average pass-through has been barely 30bp in response to 75bp of rate cuts by the RBI. Recently, HDFC Bank announced an additional 35bp cut in its lending rates, but other banks refused to act similarly. 

The RBI wants banks to focus on their marginal cost of funds rather than the average cost, but there may not be many takers among the banks given their high rate of NPAs (non performing assets). 

"RBI will opt for a pause post this cut not only till they are confident that inflation is well and truly on its way toward the March 2018 target of 4% but also until the pass-through of rate cuts by banks improves meaningfully", says Societe Generale.