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While HDFC Bank raised its base rate by 20 basis points to 10% on Tuesday, the move is unlikely to spark a round of interest rate hikes across the sector. Most bankers expect rates to remain stable given the fall in the cost of money following the Reserve Bank of India’s (RBI) decision to infuse additional liquidity into the system.
HDFC Bank is the first bank to increase its base lending rate since the RBI hiked its benchmark repo rate by 25 basis points on October 29. Analysts believe the lender is aligning itself closer to its private sector peers; at 10%, the bank’s base rate is now on par with that of ICICI Bank.
State Bank of India (SBI) chose to leave its base rate unchanged at 9.8% — the lowest in the market — after its asset liability committee (ALCO) met last week after the RBI’s policy announcement.
The bank, however, tweaked deposit rates — cutting rates by 25-200 bps on deposits worth over R1 crore, across maturities, while raising them for deposits below R1 crore by 20 bps, in the 180-210 days bucket.
Ranjan Dhawan, executive director, Bank of Baroda, categorically ruled out any immediate hike. “We will not take any rate action in the near future. We continue to watch the situation closely,” Dhawan told FE.
SK Jain, CMD, Syndicate Bank, said the last repo hike had not impacted short-term rates. “Our cost of funds has actually come down by 8-9 bps after the RBI’s monetary policy. Even if there is a repo hike later, we will see how the market reacts,” Jain added.
HDFC Bank’s net interest margin (NIM) contracted by about 30 bps sequentially during the quarter ended September 30, owing to an increase in its cost of funds. However, the hike in the base rate is unlikely to benefit margins significantly, since a large part of the bank’s loan book is not linked to the base rate, company officials said.
In August, India’s second-largest private sector bank had upped its base rate to 9.8% from 9.6% to try and offset an increase in cost of funds following the liquidity-tightening measures announced by the RBI in mid-July.
In an attempt to curb exchange rate volatility, the RBI had limited banks’ borrowings from the liquidity adjustment facility (LAF) window to 0.5% of their net demand and time liabilities (NDTL). The central bank had also hiked the marginal standing facility (MSF) rate to 10.25%; the rate was subsequently trimmed to 8.75% and additional liquidity options, in the form of seven-day and 14-day term repos, provided.
Along with HDFC Bank, other private sector lenders including ICICI Bank, Axis Bank, Kotak Mahindra Bank and Yes Bank had all raised their base rates by 25 bps each to counter the rise in cost of funds in August. While most banks are not seeing an upward move in the cost of money, the pick-up in credit growth in recent fortnights could push rates higher, should the demand for loans sustain.
In September and October, banks saw their credit portfolios growing as corporates that depended heavily on the commercial paper (CP) markets for their funding needs, shifted to the bank loan market due a surge in CP rates to 10-12%. Non-food credit growth, in the fortnight ended October 4, touched 18% year-on-year. However, since CP rates have now eased to 9% levels, bankers expect some of this demand to taper off.
“With the short-end markets correcting and the MSF rate correcting, there would actually be some movement back to the CP markets. My view is that credit growth for the year will be in the 15-16% range while deposit growth will be around 14%,” Chanda Kochhar, MD and CEO, ICICI Bank had observed soon after the policy announcement last week. In the fortnight ended October 18, credit growth fell by over 80 bps as compared with the preceding fortnight, to nearly 17% y-o-y.