While the State Bank of India (SBI) may hike deposit rates after the Reserve Bank of India (RBI) effected a repo rate hike of 25 basis points on Tuesday, taking it to 8%, other banks may refrain from any rate action as of now.
The hike in the repo rate and the increase in the marginal standing facility to 9% will mean higher cost of funds for banks who rely more on the special windows because their access to retail deposits is limited.
Arundhati Bhattacharya, chairperson, SBI, told reporters on Tuesday that while rates might rise a bit, SBI is likely to think twice before passing on the increase in costs to its borrowers. “Transmission will only happen when it affects the cost of funds. There will be a little bit of rise in deposit rates, how much of it can be passed on will depend on the capacity of the people who have borrowed money from us,” Bhattacharya said. India's largest bank held an assets and liabilities committee (ALCO) late on Tuesday to review interest rates.
Other banks, however, may take their time to decide on any rate action in the near term. “Lending rates are dependent on our cost of funds. For the last many quarters, the deposit rates have not changed, the reason is that deposit rates are, in a way, linked to the rate of inflation. You should watch the trends in inflation and deposit rates,” said Chanda Kochhar, MD & CEO, ICICI Bank.
Bankers point out that since a hike did not happen in the December monetary policy announcement, the current increase may be considered as status quo. “If inflation is to come down, as the governor seems to feel it will, then the trend probably is not for rising interest rates,” said Aditya Puri, MD & CEO, HDFC Bank. The rate hike will not put bank margins under pressure, he added.
Bankers feel any increase in lending rates will be prompted only by an increase in deposit rates, which is not likely in the current scenario. They point out that a hike in loan rates may further stress weaker borrowers at a time when bad loans are rising. Moreover, deposit rates being offered to customers need to be adjusted, keeping in mind the rising inflation in the economy. “We need to find a balance between these two,” says KR Kamath, CMD, Punjab National Bank.