Despite the Reserve Bank of India (RBI) stepping in to infuse liquidity into the banking system, bankers say liquidity could nonetheless fall short causing them to increase deposits rates which would be passed on through higher lending rates.
The RBI on Thursday cut the statutory liquidity ratio (SLR) to 24% with effect from December 18 and said it would conduct open market operation (OMO) auctions for purchase of government securities, which would infuse another Rs 48,000 crore into the system. SLR is proportion of funds that the banks need to mandatorily invest in government debt.
Union Bank CMD MV Nair said, ?Banks need to provide depositors a positive real rate of interest and currently the inflation trajectory remains high thanks to rising oil prices. As such, there continues to be an upward bias to interest rates. We are looking if we can hike rates on deposits of a longer tenure.?
Bank of India executive director BA Prabhakar said, ?Even after these measures, there may be some shortage of liquidity and so there is an upward bias on both lending and deposit rates. Interest rates on short tenure deposits including one year deposits may go up by 25 basis points.?
The executive director of a private sector bank said, ?The OMO and the deposit flows should ease liquidity pressures. However, between January and March we will see interest rates on bulk and certificate of deposits inch up. Moreover, the government balances with the RBI, currently at levels of Rs 80,000 crore need to flow back into the system.?
Corporation Bank CMD Ramnath Pradeep said, ?We were waiting for the RBI?s policy direction. Now that it is clear we may increase the base rate.? The bank?s asset liability committee will be meeting before December 25 to take a call on its base rate. Most commercial banks including ICICI Bank and HDFC Bank have raised their lending rates by 25 to 75 basis points in December.
Indian Overseas Bank CMD M Narendra said, ?RBI has announced a thoughtful policy so as not to upset the unfolding growth story of the economy which is poised to return to the pre-crisis growth rate of 9% plus.?
The RBI on Thursday expressed concern that the liquidity deficit has been accentuated by structural factors such as significantly above trend currency expansion and relatively sluggish growth in bank deposits even as the credit growth accelerated in 2010-11. Deposits grew at under 15% during the fortnight ended December 3 against RBI?s target of 18% for 2010-11.To woo depositors, commercial banks over the last fortnight have raised deposit rates by 25-175 basis points. Credit offtake has risen by 23% in fortnight ended December 3 with banks disbursing Rs 36,499 crore in the fortnight. HDFC had also raised its benchmark lending rate by 75 basis points to 15%.
Economists observe that with the RBI saying that its projected inflation of 5.5% by March 2011, now seeing an upside risk, the RBI could up rates at its next meeting in late January. The RBI left interest rates unchanged on Thursday, after six successive increases since March, 2010. Currently, the reverse repo rate stands at 5.25%, repo rate at 6.25% and CRR at 6%.
