Money starting to turn dearer

Written by fe Bureau | Mumbai | Updated: Aug 1 2013, 06:47am hrs
In a sign that money is becoming dearer, YES Bank on Wednesday upped its base rate or minimum lending rate by 25 basis points (bps) to 10.75% and deposit rates across maturities by 25-50 bps, with effect from Thursday. Wednesday saw Axis Bank too raising deposit rates by 50-400 bps across tenures.

The recent liquidity tightening measures by the Reserve Bank of India to curb the rupees volatility including capping the amount banks can borrow through its special lending window have resulted in a rise in short-term borrowing costs for banks and firms. On Wednesday, one-month certificates of deposit were trading at 11.04%, up from 7.5% before July 15, while coupons on AAA commercial paper have jumped 400 bps over the last fortnight to 12.1%. Money has become expensive at the longer end too the yield on the benchmark bond has gone up by about 50-60 basis points since July 15 and closed at 8.2% on Wednesday.

After the monetary policy announcement on Tuesday, bankers warned interest rates might head up if the RBI persisted with the measures. I think two to three weeks is the normal waiting time after which we will have to take a call, SBI chairman Pratip Chaudhuri had said.

Shikha Sharma, MD & CEO, Axis Bank, had said the cost of funds changed slowly and so banks would have to watch the market to see how they came off. Immediately we dont see any rate change but we really have to just watch the market to take a call, Sharma had observed.

Chanda Kochhar, MD and CEO, ICICI Bank said on Wednesday, "While short-term rates have gone up, for every bank as of now its a very small portion of the total funding. Depending on how long the measures last, we would see an impact or otherwise on the deposit rates and lending rates. I think we would watch the market and see how long these measures last and accordingly take decisions."

At the monetary policy announcement on Tuesday, the RBI indicated it would roll back its liquidity control measures in a calibrated manner only after the the currency stabilised. The rupee hit a new intra-day low on Wednesday, piercing through the 61 mark against the dollar but recovering to close the session at 60.40.

In fact, Oriental Bank of Commerce and Punjab & Sind Bank had held back on their decisions to cut the base rate by 25-26 bps. Both the public sector lenders also raised their deposit rates by 25-75 bps across maturities.

Banks have been struggling to raise deposits, with investors preferring assets such as gold and real estate have. For the fortnight ended July 12, deposits grew at 13.7% year-on-year to Rs 70,79,861 crore, and while demand deposits grew by 12.35%, time deposits grew by 13.85% on an annual basis.

To boost the falling rupee, the central bank had limited borrowings of banks from its special window to 0.5% of the net demand and time liabilities (NDTL) of each individual bank. It also raised the interest rate on marginal standing facility to 10.25%. RBI has also asked banks to maintain the required cash reserve ratio (CRR) on a daily basis. Banks are required to maintain 4% of their NDTL with the central bank in the form of CRR.