The Hindu Business Line : Higher costs may be passed on to borrowers

Banking stocks have ended only marginally lower after the RBI’s move to peg up both the cash reserve ratio (CRR) and the repo rate, by a higher-than-expected 50 basis points. The stock market reaction appears to capture expectations of a tightening policy bias for the future. Banks appear set to pass on the higher cost of funds resulting from this hike, to their borrowers through increases in lending rates.

In the latest round of hikes, the RBI has increased the repo rate by 50 bps to 8.50 per cent and the CRR by 50 basis points, to 8.75 per cent. This rate hike is intended to curb inflation, which stood at 11.05 per cent for the week-ended June 7, and temper demand growth, reflected in the 21.4 per cent growth in money supply and 26 per cent credit growth for the week-ended June 7. Both were higher than the RBI expectations.

No liquidity crunch

Despite the recent CRR and repo rate hikes, many banks have no immediate problem with liquidity, as aggregate deposits have grown by 23.2 per cent in the year to June 6. Banks may opt not to actively use the repo window to borrow funds, but may still have to deal with pressure on call rates in the money market.

The CRR hike will also suck out Rs 19,000 crore from the system, without yielding any returns. The hike in rates forces banks to maintain their margins by increasing their lending rates, which may lead to slower credit offtake or deteriorating asset quality.

A few banks such as J&K Bank, YES Bank, IndusInd Bank and HDFC Bank have already increased their benchmark PLR before this move. The increase in the lending rate for PSU banks is inevitable, after these banks softened rates in February 2008, owing to regulatory pressures. Sectors such as automobiles and realty may bear the brunt of slower offtake, if interest rates continue to rise.

Sticky rates

We are in a rising interest rate regime and the bankers are not denying the possibility of another rate hike in coming months, as the inflation has not bottomed out. The tightening of monetary supply is a measure that will compromise economic growth with a lag. Past experience also suggests that while policy rates may be increased in rapid succession to quell inflation, reductions may not take place at the same pace.

Related Stories:
Loans set to become dearer

More Stories on : CRR & Bank Rates | Outlook | Stocks

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