<b>Credit Policy Impact</b>: Deposit rates to decline

 The immediate impact of the hike in the CRR will be on short term rates. Call rates, which were below 1% is expected to inch up to around 6% in the coming days. The increase in call rates will push up short-term rates on commercial papers and certificate of deposits.

O P Bhatt, chairman, State Bank of India said t he hike in CRR is likely to push up short term-lending rates, and profitability of banks will be under pressure. The hike will not have any direct impact on liquidity condition since there is ample resources in the system. We have seen some softening of deposit rates but it may not come down further immediately.

"The policy supports the objective of growth and stability.  Call rates and other short-term rates in the reverse repo and repo corridor is expected to move up. This provides an opportunity for treasury to deploy resources and improve yields to protect margins," Bhatt added.

"The hike in cash reserve ratio will see an outflow of around Rs 15,000 crore. This outflow is unlikely to impact the comfortable liquidity situation in the system. Considering that the inflows into the system is also robust one has to see how the liquidity situation pans out. The comfortable liquidity situation had seen deposit rates come down slightly in March. However, in April the rates have remained stagnant. On the lending side one will have to see how the liquidity situation is in the coming days,'' said Vishakha Mulye, CFO, ICICI Bank.

 "The CRR hike is unlikely to have any immediate impact on either deposit or lending rates though there is a need to take a wait-and-watch approach to assess how the demand-supply situation pans out. Though credit offtake has slowed down marginally in the last few months, it is largely an impact of the slack season. We expect corporate borrowing to remain robust in the coming months,'' said Neeraj Swaroop, chief executive officer, India, Standard Chartered Bank.

 Updated at 1600 hrs: The accretion to bank deposits during the current financial year so far (April 1-July 6, 2007) stood at Rs 1,05,727 crore - a 14-year high.

Banks have aggressively mobilised time deposits (including certificates of deposit) with aggregate deposit growth of Rs 1,02,866 crore in the first quarter of 2007-08 outstripping the 11-year high recorded in 2006-07 at Rs 75,626 crore. 

Y V Reddy, Governor, Reserve Bank of India (RBI) and Finance Minister P Chidambaram, in their interaction with bank chairmen, have been insisting that banks take active steps to boost deposit growth to fund the productive sector. The RBI, in the recent past, had also expressed concern over banks raising funds through certificates of deposits.

"The increase in deposit rates have contributed to the overall growth in banks deposits base. The increase in time deposits can be attributed to increased economic activity, increase in interest rates on bank deposits, unchanged interest rates on postal deposits and extension of tax benefits under Section 80C for bank deposits,'' senior bankers said. 

On a year-on-year basis, banks have seen a 24.4% increase in aggregate deposits at Rs 5,31,881 crore up to July 6, 2007, which was higher than 20.9% at  Rs 3,77, 392 crore in the year-ago period. The outflow of long-term deposits during the preceding two years has been arrested and there were fresh accretions to long-term deposits in April-June 2007, which augurs well for banks