Banks prepared to wait and watch, as the policy is in sync with market expectations.
Terming the third quarter monetary policy review as judicious and in sync with expectations, bankers on Tuesday said although the scenario presented a case for a rise in interest rates, it might not just be round the corner.
“For a long time, there has been an upward bias in interest rates and we have seen that getting translated into actual rates increases, both on the deposit and the advances’ side. However, there is always a little lag between the transmission signal and the actual event,” said State Bank of India Chairman O P Bhatt. The asset liability committee (Alco) of the bank would meet shortly to discuss the issue, he said.
“A minimum (25 basis points) rise like this need not necessarily translate into further rate rises. It is up to Alco to take a call,” he added.
The Reserve Bank of India (RBI), in its quarterly monetary policy review on Tuesday, raised key policy rates by 25 basis points each, in line with market expectations. It also raised its inflation projection for March to seven per cent from 5.5 per cent. The economic growth projection was retained at 8.5 per cent, though it added that there was an upside bias to growth.
“A rise of 25 basis points does not immediately translate into a deposit or a lending rate increase. The increase depends on how the cost of funds and the supply of money are moving. The cost of deposits has been moving up, so there is clearly an upward bias in interest rates,” said ICICI Bank Managing Director & CEO Chanda Kochhar. However, she added the extent and timing of the rise would depend on individual banks.
During March-November, the regulator, as part of its calibrated exit from the crisis-driven expansionary monetary policy, increased the repo rate, or the rate at which it lends to commercial banks, by 150 basis points. It raised the reverse repo rate, or the rate at which it absorbs money from banks, by 200 basis points. In addition, the cash reserve ratio was raised by 100 basis points in the same period. Consequently, banks raised their deposit and lending rates by 25-250 basis points and 25-100 basis points, respectively, between July 2010-January 2011. However, the pace of growth in credit has been much higher than deposits during the past year, which, according to RBI, is the structural reason behind liquidity pressure in the system.
While the year-on-year credit growth for all the banks was 24.2 percent, deposits grew by 16.5 per cent, as against RBI’s indicative projection of 20 per cent and 18 per cent, respectively.
“Clearly, there is a bridge between deposit and credit growth and that’s the structural factor responsible for liquidity deficit...they (banks) must increase their deposits and restrain their credit. The credit and deposit growth has to be aligned,” RBI Governor D Subbarao said in the post-policy press meet.
Union Bank Chairman and Managing Director M V Nair said though the key concern had been deposit mobilisation, attaining RBI’s projection of 18 per cent growth in deposits during the current financial year was possible.
“Most banks have increased the deposit rates lately and the deposit growth has also moved up. Whether it will touch 18 per cent, I think it is possible. Otherwise, we may have to necessarily pass on the rise and increase the deposit rate which, in turn, may impact the base rate,” he said. Echoing Nair, Punjab National Bank’s Chairman and Managing Director K R Kamath added there was a need to balance credit and deposit growth in the coming quarters. “Inflation is a concern, interest rates have an upward bias. These are all indicative of things. There is a case for interest rate increase, both on the deposit and lending side, but when and how, the market will decide,” he added.
