Banks get a Christmas gift, but not borrowers

The RBI Governor has handed banks an early Christmas gift by keeping interest rates unchanged when everyone expected a hike. This helps them keep their costs under check. But borrowers may need to wait longer to join the festivities. Interest rates for them may remain high on niggling worries about a later rate hike and banks’ unwillingness to lower deposit rates.

Relief for banks The repo rate has been left unchanged at 7.75 per cent, even though the markets had braced up for a 25 or even 50-basis point hike.

This should have banks heaving a big sigh of relief. A rate hike would have increased their costs at a time when they can ill-afford to pass them on to borrowers.

The RBI’s actions since September have made life a lot easier for banks. One, by trimming the Marginal Standing Facility (MSF) rate by 150 basis points since September, the RBI has significantly lowered banks’ cost of funds. They were borrowing more from the MSF window than the repo window and have seen their costs reduce by 100 basis points in total in the last three months.

Two, the move to introduce the shorter seven-day and 14-day term repo windows has also meant easier liquidity. Borrowings from this source, which originally cost 8.5-8.7 per cent, are now available at 8 per cent.

As a result, banks’ cost of borrowings came down further by another 10-15 basis points. The new term repos have also helped banks reduce their dependence on the costly MSF from 60 per cent to 10 per cent of their requirements.

The liquidity situation for banks has significantly improved in the last month, too. From knocking at the RBI’s doors for Rs 1-lakh crore daily in September, banks are now borrowing only around Rs 70,000-80,000 crore from the central bank. The over $30 billion of dollar inflows that have come into banks’ deposit coffers due to the new FCNR (B) scheme as well as the RBI’s open market operations have helped infuse liquidity.

None for borrowers So in short, there have been cost savings of close to 100 basis points for banks since September. How much of this can you, as the borrower, hope to save?

Probably nothing, as of now. On the contrary, we have seen banks, such as HDFC Bank and SBI, increase their benchmark lending rates in November. As lending rates are a function of the deposit rates, the former can only trend down when the latter does. Here, the slow pace of deposit mobilisation and tight liquidity conditions have prevented banks from cutting deposit rates.

This may not change much, even though banks are now flush with liquidity. After all, bank deposits need to compete with other investment avenues to deliver an inflation-beating return.

With consumer inflation still holding up at over 10 per cent and tax-free bonds giving bank deposits a run for their money, banks may not be willing to cut deposit rates just yet. Even when they do, be ready to earn less on your bank deposits, before your EMIs begin to decline.

> radhika.merwin@thehindu.co.in

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