The hike in the repo rate and the increase in the marginal standing facility to 9% will mean higher cost of funds for banks who rely more on the special windows because their access to retail deposits is limited.
Arundhati Bhattacharya, chairperson, SBI, told reporters on Tuesday that while rates might rise a bit, SBI is likely to think twice before passing on the increase in costs to its borrowers. Transmission will only happen when it affects the cost of funds. There will be a little bit of rise in deposit rates, how much of it can be passed on will depend on the capacity of the people who have borrowed money from us, Bhattacharya said. India's largest bank held an assets and liabilities committee (ALCO) late on Tuesday to review interest rates.
Other banks, however, may take their time to decide on any rate action in the near term. Lending rates are dependent on our cost of funds. For the last many quarters, the deposit rates have not changed, the reason is that deposit rates are, in a way, linked to the rate of inflation. You should watch the trends in inflation and deposit rates, said Chanda Kochhar, MD & CEO, ICICI Bank.
Bankers point out that since a hike did not happen in the December monetary policy announcement, the current increase may be considered as status quo. If inflation is to come down, as the governor seems to feel it will, then the trend probably is not for rising interest rates, said Aditya Puri, MD & CEO, HDFC Bank. The rate hike will not put bank margins under pressure, he added.
Bankers feel any increase in lending rates will be prompted only by an increase in deposit rates, which is not likely in the current scenario. They point out that a hike in loan rates may further stress weaker borrowers at a time when bad loans are rising. Moreover, deposit rates being offered to customers need to be adjusted, keeping in mind the rising inflation in the economy. We need to find a balance between these two, says KR Kamath, CMD, Punjab National Bank.
In his monetary policy announcement, RBI governor Raghuram Rajan noted that inflation is set to moderate going ahead, which may result in no rate hikes in the future. Bankers who met the RBI governor on Tuesday also interacted with the central bank on the discussion paper on management of non-performing assets (NPAs), viability of automated teller machines (ATMs) and the need to manage counterfeit notes.
Since he took over in September, Rajan has raised the repo rate by 75 bps, which forced leading banks to revise their lending rates by 10-20 bps. SBI had hiked its base rate twice by 10 bps each time, to 10% finally. HDFC Bank and ICICI Bank, too, hiked their respective base rates to 10% each.
Banks have been seeing a significant moderation in credit growth due to a lack of demand from the wholesale lending business. Deposit growth in the banking system has surpassed credit growth for the fourth consecutive fortnight, as per RBI data. In the fortnight ended January 10, non-food bank credit grew 15% year-on-year, while deposit growth stood at 15.56% from a year ago.