The State Bank of India’s decision to increase deposit rates by 25-100 basis points earlier this week has stumped its peers, who were planning to lower these rates after March.
As banks’ base rate is linked to their cost of funds, bankers said reduction in the minimum lending rate was not possible until deposit rates declined.
Some banks may even postpone the quarterly review of their base rate to June, to avoid an increase in lending rates. “In this environment, no bank is keen on increasing lending rates. So, either they will have to cut deposit rates or delay the review of the base rate to avoid a rise in the lending rate,” said a senior executive of a large private sector bank.
Most bankers, in both private and state-owned ones, said after SBI’s rate action, the scope for an immediate cut in deposit rates was absent. Hence, if the base rate was reviewed in April, banks may have to increase lending rates to reflect the higher cost of funds. “We cannot understand why SBI had to raise deposit rates now. We have no plans to increase our rates but the move has ruled out any scope for a cut in our deposit rates,” said a senior official of a private bank.
This was the second time in less than a month that the country’s largest commercial bank raised its deposit rate. SBI is offering a maximum 10 per cent interest on deposits of seven to 90 days.
SBI officials said it was unlikely the bank would pare its base rate anytime soon. “Even if there is a repo rate cut by the Reserve Bank of India (RBI), market rates are not going to come down. Also, at a time when companies are not sure about their future and credit risks are high, it does not make sense for banks to lend at lower rates,” a senior executive of the bank said.
RBI is scheduled to issue its annual monetary policy for 2012-13 on April 17, amid strong demand for interest rate cuts to support economic activities.