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of funds following the liquidity-tightening measures announced by the RBI in mid-July.
In an attempt to curb exchange rate volatility, the RBI had limited banks’ borrowings from the liquidity adjustment facility (LAF) window to 0.5% of their net demand and time liabilities (NDTL). The central bank had also hiked the marginal standing facility (MSF) rate to 10.25%; the rate was subsequently trimmed to 8.75% and additional liquidity options, in the form of seven-day and 14-day term repos, provided.
Along with HDFC Bank, other private sector lenders including ICICI Bank, Axis Bank, Kotak Mahindra Bank and Yes Bank had all raised their base rates by 25 bps each to counter the rise in cost of funds in August. While most banks are not seeing an upward move in the cost of money, the pick-up in credit growth in recent fortnights could push rates higher, should the demand for loans sustain.
In September and October, banks saw their credit portfolios growing as corporates that depended heavily on the commercial paper (CP) markets for their funding needs, shifted to the bank loan market due a surge in CP rates to 10-12%. Non-food credit growth, in the fortnight ended October 4, touched 18% year-on-year. However, since CP rates have now eased to 9% levels, bankers expect some of this demand to taper off.
“With the short-end markets correcting and the MSF rate correcting, there would actually be some movement back to the CP markets. My view is that credit growth for the year will be in the 15-16% range while deposit growth will be around 14%,” Chanda Kochhar, MD and CEO, ICICI Bank had observed soon after the policy announcement last week. In the fortnight ended October 18, credit growth fell by over 80 bps as compared with the preceding fortnight, to nearly 17% y-o-y.