The Hindu Business Line : Banks may take call on deposit rates

Mumbai, April 29 Interest rates could see an upward bias following RBI’s latest hike in the Cash Reserve Ratio (CRR) by 0.25 percentage point to 8.25 per cent, said bankers and analysts. Margins could come under pressure and banks could look at reducing their deposit rates. While lending rates may not move up immediately, bankers said that in the medium term rates may come under pressure if the liquidity in the system dries up.

Ms Meera Sanyal, Country Executive, ABN-Amro Bank, India and Chairperson, ACES, said, “Headline inflation runs the risk of rising to higher levels. Going forward, therefore further monetary tightening is likely. The possibility of more CRR hikes becomes apparent if we consider that the RBI’s target for money supply growth for FY09 is 16.5–17 per cent, compared to 20.7 per cent last fiscal year. This does tie in with a lower GDP growth estimate of 8–8.5 per cent, slower pace of bank credit growth and the possibility of an extended slowdown in capital inflows. A hike in the repo rate cannot be ruled out either.

“Bank lending rates might not move up immediately following the policy move, as there is ample liquidity in the banking system at present. However, considering that the RBI is inclined towards mopping excess liquidity, rates would come under pressure as and when the liquidity tightens.”

Appropriate choice

Some bankers felt that the RBI’s choice of a CRR hike instead of a repo rate hike was appropriate.

Mr Gautam Vir - MD and CEO, Development Credit Bank, said, “Given the tough choices, the RBI move is a well thought out move, as a repo rate hike, would still have kept open the possibility of a CRR hike, and that would have kept the markets on tenterhooks. Measures like checking bank exposures to the commodity sector, reviewing prudential guidelines for banks exposures in the off balance sheet segment are quite timely in view of current global and local uncertainties.”

However, analysts sounded a note of caution about the pressure on bank margins.

Mr Ravikant Bhat, Banking Analyst, IDBI Capital, said that banks may take a call on deposit rates as the CRR hikes hurt banks’ margins. “Given the risks associated with increasing lending rates, deposit rate cut makes better sense for banks. However, banks will have to be cautious as low deposit rates two years back were not helping banks grow their deposits and the incremental lending took place through liquidation of excess Statutory Liquidity Ratio.”

Thumbs up

Senior bankers from the public sector gave their thumbs up to the annual monetary policy. Mr O.P. Bhatt, Chairman, State Bank of India, said “By keeping rates on hold and also promising to ensure adequate liquidity and credit for productive sectors, RBI has indicated its support for maintaining the tempo of investment in the economy.”

Mr M.V. Nair, Chairman and Managing Director, Union Bank, said, “RBI has given high priority to price stability, and orderly conditions in financial markets while sustaining the growth momentum. After 75 basis points (50 + 25) CRR hike, any hike in policy rates would have led to hardening of interest rates. Moreover, RBI would also like to wait to see the impact of the CRR hike.”

More Stories on : Credit Policy | Fixed Deposits | Interest Rates | Credit Policy

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page