Several high yield deposits have been taken off the shelf by banks. And come August first, all banks are likely to cut deposits rates sharply. Banks are waiting for some confirmation that RBI will continue its abundant money policy.

Excess cash in the banking system is making bankers want to cut interest rates. But what bankers seem to be waiting for is the quarterly review of the monetary policy, where they hope to get some confirmation from the RBI that it will continue its policy of flush Money Policy. The April Credit Policy Statement of the RBI was distinctly hawkish, with a warning from Governor Reddy that it will act promptly if inflation or global circumstance warrants.

But the RBI's actions were contrary to its talk. In early March it said that it will take more than Rs 3000 crore in its daily reverse repo auctions. By May the surplus cash in the banking system had risen so much that the call rates since then have fallen to less than one percent and have remained there. This is the longest ever that call rates have been so negligible.

Effectively what this means is that today since there is no call market, no operational repo or reverse repo rate, the RBI can't transmit any policy hike. In all countries the reverse repo is the rate at which the central bank absorbs cash from banks everyday and the repo is the rate at which it lends money. By raising these rates, monetary authority signals a rate hike and vice versa.

So in this policy due on July 31, banks won't be looking out for rate signals. Bankers say they are waiting to see if the RBI will remove that self imposed Rs 3000 crore cap on its reverse repo absorption. If the cap goes, banks may not bring down rates much. But if it remains, banks are sure to slash borrowing and lending rates.

Bankers argue that RBI need not worry about inflation as it’s to 4% and bank lending is down to 24% from 31% last year. It could retain the cap on reverse repo for a little longer, and allow money market rates to remain abysmally low.

This discourages NRI Dollar flows, which were flooding into fixed maturity plans of Indian mutual funds, which were in turn investing in the high yielding call and money markets until may. In short RBI will remain focused on keeping Dollar flows at bay; it will keep local liquidity high and hence a regime of soft rates is round the corner.

Softer rates are here already. Banks like ICICI and Citigroup have already slashed 7 to 14 day deposit rates to just 0.5%. Even corporate which keep their excess cash with banks in one year deposits are earning not more than 9.5%. That's a drop of more than 200 basis points over the past three months.