A 100 bps cut in discount rate, and no jubilation in the stock market? Yes, that is the new normal. The rate cut was higher than consensus estimates, although not surprising. Some say the market had already priced it in taking a cue from the government paper yields, but then the market had not exactly gone bonkers in the sessions leading to the monetary policy decision either.
So what is it that has made the discount rate almost a non-affair for the market? For one, market analysts believe the blue chips and market movers are not as leveraged as they used to be. So there is not much earnings and fair value twisting around. Secondly, most companies do not have highly ambitious expansion plans either, making the rate cut a non-issue.
Yes, the SBP has firmly thrown the ball in the bank's court. And if the recent mood of the banking industry is any guide, banks seem in no hurry to return the ball. Ideally, decades low interest rate should be ground enough to believe companies flocking in for more advances and the banking sector ready to facilitate.
But, things of late have been far from ideal. Yes, the rates are now at a 42-year low, but they had not exactly been all that high in the past 12 months or so - yet the advances growth remained dismal. The economy may well be looking up, but the bigger question is that are banks ready to lend to the private sector? The argument goes that they are now left with no option but to lend, as spreads trim further and government papers become less lucrative.
The argument holds value. Only that the sector has learnt to live with low spreads. The highly irrational exercise in the name of debt re-profiling also allowed banks to forget about private sector lending as they sit pretty on long-term papers. Exactly why did the government borrow in the longer term in a declining interest rate scenario remains a mystery, but banks are not complaining.
Furthermore, as the return requirement on deposit has not gone down by the same proportion, there would be more pressure on spreads. What would the banks do? They can lend more to cope up with lower yields. Or they can continue re-profiling their deposit mix. Most banks were seen improving their CASA ratio last year and don't be surprised, if they continue doing so again.
Next four to six months would provide a clearer view of where the banking industry stands in terms of willingness to lend. Right now, the rate cut alone does not guarantee anything.
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