Bankers won't take call on rate hike yet

Written by fe Bureau | Mumbai | Updated: Jul 31 2013, 14:57pm hrs
The Reserve Bank of Indias decision not to immediately roll back its liquidity tightening measures may force banks to push up deposit and lending rates. The countrys largest lender, State Bank of India (SBI), confirmed that the bank will take a call on interest rates in less than a month.

Two-three weeks will be a normal waiting time. After that, we will have to take a call, SBI CMD Pratip Chaudhuri told reporters on Tuesday. Loan demand is too weak. These steps are temporary; so, unless they linger for too long, none of the banks will change pricing, he added. Chaudhuri also felt that any decision to increase lending and deposit rates will depend largely on the redemption pressure that banks are likely to face.

In its policy announced on Tuesday, the central bank stated that it will stick to its decision of limiting short-term borrowing by banks through the liquidity adjustment facility window to 0.5% of each individual banks net demand and time liabilities (NDTL). RBI will also maintain the marginal standing facility (MSF) window at 10.25%, or 300 basis points above the repo rate. Also, banks will continue to maintain cash reserve ratio (CRR) at 99% on a daily basis. RBI said it will roll back these measures in a calliberated manner when stability is restored in the foreign exchange market, enabling monetary policy to revert to supporting growth with continuing vigil on inflation.

There was always some apprehension that transmission will take place. But we are aware that banks have some cushion available to them, said RBI governor D Subbarao in response to the fear that rates in the economy will rise at a time when growth remains sluggish. While SBI may set the tone if it chooses to move on rates, private sector lenders seem to be taking a wait-and-watch approach.

What happens to the long-term rates clearly depends on the time period. So, I dont think it is possible to either set a date or a specific exchange rate and say that this has been achieved. I think what will have to be watched is some trend and a multiplicity of factors, ICICI Bank MD & CEO Chanda Kochhar. Axis Bank MD & CEO Shikha Sharma believes that the movement in rates will entirely depend on cost of funds. The cost of funds changes very slowly. I guess we have to watch the market and see how they come off. As of now, we dont see any rate change, but we really have to just watch the market to take a call, Sharma said.

Bankers asked for some leeway with respect to the implementation of these measures, if they are not reversed. If the desired objectives are not achieved in a couple of months and the rollback does not happen, then, probably, the banks will look for some sort of a support in terms of valuation of securities. Maybe, the RBI can consider rolling back of HTM (held-to-maturity) level to 25%. Second, we want time to shift securities. Third, it should be done on a valuation as on July 15, Punjab National Bank CMD KR Kamath said.