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Banks may look at hiking interest rates if the measures announced by the RBI to squeeze liquidity are sustained for long, bankers said.
For now, banks will however, wait for the Reserve Bank of India’s first quarter review of monetary policy on July 30.
“The liquidity tightening measures are clearly temporary, aimed at stabilising the rupee. Borrowing costs will rise if the measure stays for long and banks might have to look at hiking rates. We will have to wait and watch how long this move will last,” said V.R. Iyer, Chairperson and Managing Director, Bank of India.
Borrowing costs
On Tuesday, the central bank tightened liquidity by capping each bank’s access to daily borrowing under the liquidity adjustment facility (LAF) to up to 0.5 per cent of their deposits. Given that aggregate deposits in the banking system stood at Rs 70,90,000 crore in the fortnight ended June 28, the system as a whole can access only Rs 35,450 crore a day from the RBI.
This move will make borrowings more difficult for smaller banks.
Iyer said the new stipulation is, in effect, a hike in the cash reserve ratio. “Though Bank of India is not borrowing at present, the liquidity need will arise later, and this might affect the borrowing costs. These measures look temporary,” Iyer said.
In another liquidity-draining measure, the RBI asked banks to maintain a minimum daily CRR (the slice of deposits they have to park with the RBI) of 99 per cent of the requirement, against 70 per cent earlier.
Rates will rise
According to S. Srinivasaraghavan, Executive Vice-President and Head, Treasury, Dhanlaxmi Bank: “Banks will hike short-term deposit rates. We will have to wait and watch and track the rupee movement for further clarity on monetary policy.”
Parthasarathi Mukherjee, President, Large Corporates and International Business, Axis Bank, said: “Clearly, it will squeeze credit and short-term interest rates will rise. Credit growth will be marginally impacted as this seems a short-term measure focused on curbing rupee volatility. Banks will certainly wait for the policy before hiking interest rates as the situation is rapidly changing.”
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