Cheer up! Demonetisation is also going to bring interest rates down. Here’s how

Demonetisation might have caused inconvenience to the common man but it will also help them as swapping of old notes has resulted in filling coffers of the banks, which are flooded with money, thereby pulling the interest rates down.

The longstanding complaint of the Reserve Bank of India (RBI) that banks weren't passing on rate reductions may be addressed soon. Before demonetisation, banks were out of currency.

Now since banks are getting the capital, lending rates are likely to follow suit in a few weeks, possibly giving sluggish credit expansion a much-needed boost and shoring up growth.

"All rates will fall.The bank has seen huge inflow of deposits but demand for credit has slowed down. Therefore, lending rates too will fall but after a gap,” said SBI Chairman Arundhati Bhattacharya.

Executives at Punjab National Bank, Bank of Baroda and Bank of India told ET they would be looking at cutting deposit rates soon.

It’s estimated that the banks have collected deposits worth a total Rs 4 lakh crore and it is expected to reach Rs 10 lakh crore by the end of December 30th.

"This kind of deposit collection is as good as a cut in CRR by 4% and this will lead to interest rate transmission without a cut in policy rates," R Marathe, managing director and CEO of Bank of Maharashtra, told ET.

At present, CRR is at 4%. In the past few years, RBI has nudged banks several times to pass on cuts in key rates to end customers. Former RBI governor Raghuram Rajan made the point repeatedly during his tenure.

"We expect banks to reduce deposit rates by 75-100 bps over the next six-nine months. The new regime of MCLR will immediately take into account the lower cost and will thereby lead to a decline in lending rates and improved transmission,” Shubhada Rao, chief economist, Yes Bank, toldET.