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The Reserve Bank of India increased repo and reverse repo rates by 25 basis points, much on expected lines. More importantly, the central bank has indicated that we may be at the peak of the interest rate cycle and that the probability of another rate hike in December policy review is low. We believe that the banks may not pass on increased costs to consumers.
We are facing global headwinds as commodity prices remain strong despite fears of a global slowdown. With the currency rate being where it is, any increase in commodity prices, especially crude and coal, can have an adverse effect on inflation, and may force the RBI to rethink.
Structural changes
The RBI has announced far-reaching structural changes in terms of liberalisation of branch licensing policy and announcement of roadmap for improving liquidity in the bond markets. The RBI has permitted domestic scheduled commercial banks to open branches in Tier-2 centres without RBI's prior approval and subject to reporting.
This opens up tremendous opportunity for banks like ours. We are planning to increase our branch network from 823 to 1,000 by 2012. With this move of RBI, we hope to achieve the same much earlier.
The RBI's announcements on bond market reforms would bring in the much-needed liquidity in the bond markets and will aid in use of newer risk mitigant tools.
The RBI made another significant announcement regarding deregulation of saving bank deposit interest rates.
The move is a very smart one that will protect the interest of the small depositor as the RBI has asked banks to have uniform rates for all SB deposits up to Rs 1 lakh.
Two-tier rates
The announcement ensures that two tiers are created immediately, one for balance up to Rs 1 lakh and another for balance above Rs 1 lakh.
We believe that interest rates on savings deposit would head south in the long run; but this may not happen in the short run, where some price discovery is possible in the next 60-90 days.
This would help banks like ours improve the customer profile and also to expand our portfolio of current and savings account deposits.
We will have to wait for operational guidelines, before we decide on our move on this.
(The author is MD & CEO, Federal Bank).
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