The Hindu Business Line : PSBs to wait for RBI signals

June 20 It is almost a certainty that banks will now have to pay more for deposits they take from you. By the same token borrowers also better brace up for paying higher amounts on the loans that they took. Inflation was expected to be a fraction below double digits going by estimates of experts over the past week. The higher than expected range had the market expecting rate hikes from banks.

When inflation was last in double digits nearly thirteen years ago, sometime in 1995, lending rates of top banks and institutions were in the range of 16% to 20%. Deposit rates across a 1 to 5 year period were in the region of 12 to 13%.

When the inflation number was announced as 11.05% this morning, immediate reaction from the Reserve Bank of India was anticipated. After all, the numbers are way above what was RBI’s comfort zone of 5% to 5.5% inflation. Till late this evening, there was no news on that front.

Public sector banks who look for cues from the RBI preferred to play the wait and watch game even as the bad news filtered in this morning. Most banks took shelter under a safe harbour clause saying, “We are planning to review rates”. There was no indication on when or by how much much they would raise rates.

Only one bank -a private sector one, HDFC Bank, was ready to make an announcement of an increase. It has increased its prime lending rate by a quarter percentage point to15.25%.

Higher than expected

The Chairman and Managing Director of Corporation Bank, Mr B. Sambamurthy, has said that the inflation number was higher than the expected. He told Business Line that it was expected that the numbers would be higher because of petro price hike a few days ago. Most people expected that inflation number would be in the range of 10 per cent.

He said that the Reserve Bank of India would do some kind of policy reforms on these kinds of numbers.

Asked if there will be a hike in lending rates, he said: “We need to watch what they (RBI) will do, and then follow suit. We will see for the next three-four days what is going to happen. ”

Speaking on the inflation numbers, Mr Ananthakrishna, Chairman and Chief Executive Officer of Karnataka Bank, said: “The bankers now expect, I think, an increase in cash reserve ratio.”

Asked will there be hike in lending rates, he said it will follow RBI’s measures.

No immediate action

The Kolkata-headquartered banks anticipate a hike in Cash Reserve Ratio and repo rate . They, however, rule out any immediate action by the central bank.

“The RBI might announce a 50 basis point hike in CRR in two tranches. However, the central bank might not take any immediate action and will prefer to wait and watch,” said a senior bank official at a public sector bank.

Senior bank officials also said that there would be no immediate increase in interest rates on both deposits and advances, and any decision pertaining to interest rates would be taken post the month of June. “Banks will take a call on interest rates after June 30 as they are currently busy with the implementation of the debt waiver scheme,” said Mr T.M. Bhasin, Executive Director, United Bank of India.

According to him, interest rates on deposits and advances might inch up after June. “Deposit rates have to move up and if that happens, then it is natural for the lending rates to also inch up slightly,” he said.

Another view

Mr V.K. Dhingra, Executive Director, UCO Bank, however, felt that the central bank would intervene immediately in order to rein in inflation. “The RBI might hike CRR and repo rate immediately in order to tackle the problem of inflation. This will have an impact on interest rates,” he said. “Returns on deposits have turned negative due to high inflation. Deposit rates, therefore, have to be revised accordingly,” he said. The high rate of interest might, however, have little impact on the credit offtake, as bankers expect a higher demand for credit starting July. “Kharif crops and demand from the agricultural sector will push the demand for credit and will add to some fresh disbursements,” Mr Bhasin said.