Bankers are unlikely to reduce interest rates even though the finance minister (FM) P Chidambram last week sought for a lower lending rate. In fact, the country?s largest government bank, the State Bank of India, hiked its near-term deposits rates by 25 to 175 basis points on Friday? the day Chidambaram asked bank chairmen to cut rates.
?The finance minister had also told bankers that they should also ensure that there were no mis-matches between their assets and liabilities before lowering rates. In that sense it was not a directive from the FM,?? said a government banker. SBI raised less than one-year deposits by 100 to 175 bps last Friday at 7.5% and 7%. Given the current scenario, banks expect a steady-to-firm trend in rates at least till March 15, the last day for corporates to file tax returns.
The net outflow from the system is expected to be around Rs 35,000 crore to Rs 40,000 crore. Bankers therefore anticipate some firming of rates from then on in the near- term tenors. Besides, with banks having raised huge deposits, especially one-year deposits, during the first quarter, April-June, of 2007-08, the average cost of 9.8% leaves no room for any rate cuts, bankers said.
?If you add the cost of CRR, the average costs goes up by another 60 basis points,?? said a senior official at a large-government bank.
Another major factor going against a softening rate trend is the suppressed wholesale price index at 3.5%, which currently does not reflect the cost of rising global crude oil prices. However, consumer price index for November 2007 has shown a rise of 5.1% over the year and ?that explains the true picture of the cost of living,?? said an economist at a government bank.
Banks, therefore, are in a situation where any cut in rates should be first begin on the deposits front. Given the high costs of funds, bankers may leave rates untouched. ?I see the rate flat between now and the current fiscal year-end,?? said Parthasarathi Mukherjee, president, Axis Bank.
?Banks are more likely to look at the rate structure afresh in the new fiscal beginning April 1,? he added. ?That is when most high-cost deposits would mature, ? said another government banker. Meanwhile, there has been some easing on overnight rates that has brought some relief to bankers. The overnight rates that were hovering around 7.8%-8.1% till early last week now currently are at the 5.8% -6 % levels. This however, is seen temporary and banks do not see this as a signal to easing rates.