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You know that argument that banks tell you that oh we can't cut rates because theirinput rates don't fall when RBI cuts repo? That's because 40% of all deposits are CASA (Current accounts, or Savings accounts). Across the banking system.
Of 120 lakh crore in deposits, about 50 lakh crore is CASA. THese are either at 0% interest rate (current account) or 4% or so (savings account). These are very low rates. They don't change when RBI cuts rates because RBI rates are at 6% now, even after the cut.
When CASA rates are unchanged because tehy are much lower than RBI rates, and CASA is 40% of the banking system input, then input rates will not fall much. even if banks cut deposit rates. BECAUSE BANKS GET 40% OF THEIR MONEY AT MUCH LOWER THAN RBI REPO RATES.
Lending rates have to be higher than deposit rates. Deposit rates don't fall. Because of such high CASA, eventually, banks will not see lower deposit rates and therefore will not cut lending rates.
You can't cut CASA by force, of course. But what will then prompt the change to lower rates? NBFCs. They don't have CASA, and can borrow from markets, and if markets give them lower rates, they can cut their lending rates and beat the banks at the game.
Markets are starting to lower rates for good NBFCs, who may now get to borrow around 7% or so, but most longer term borrowing is still at 9%+ since the IL&FS crisis. So till that changes, rates for the economy remain high.
Solving this is not an easy problem for a regulator, but at this point it just has to sidestep banks who are happy with bloated CASA, and move to cut rates at NBFCs or such; this will be the next part of the Indian QE (after buying gov bonds, doing dollar swaps)
