Lending/deposit rates unlikely to rise immediately

MID-TERM REVIEW OF ANNUAL POLICY 2004-05/ RETAIL IMPACT

Repo impact seen on call money, commercial paper, corporate debt markets.

Commercial banks are unikely to rush to increase their deposit or lending rates in the near future despite the Reserve Bank of India hiking the short-term repo rate by 25 basis points today (One basis point is one hundredth of one per cent).

The asset prices are unlikely to be affected by the increase in the repo rate, bankers said. The impact of the increase in the short-term rate is likely to be confined to the government securities, money and bond markets. This would translate into higher call rates, commercial paper and corporate bond rates.

The Reserve Bank of India governor in an interview to Business Standard said that, "...banks are not likely to touch asset prices now since they are enjoying the phenomenal pick up in the credit business. But we have not directed them on anything."

Indian Banks' Association chairman & Bank of Baroda, chairman and managing director (CMD) P S Shenoy ruled out any immediate hike of deposit or lending rates.

"There will be no change in any of our deposit rates or lending rates. The repo rate hike will affect only the short term rates in the money market. There will no change in our prime lending rate (PLR)," said M Venugopalan, CMD, Bank of India.

The bank has an asset-liability committee meeting (ALCO) in the next two days. On whether it would increase its housing loan rates, Venugopalan said the bank was yet to study the impact of the increase in the risk weightage of housing loans.

But banks certainly can raise the sub-PLR rates which they offer to top firms as they have been doing in recent months, said experts. This would lead to decrease in the spread between the sub-PLR and the benchmark, PLR.

"There is no urgency to review interest rates of deposits or loans at the moment. However the entire policy statement will be discussed by our ALCO day after tomorrow. Although the sentiment on interest rates has changed we do not move our rates based on sentiment," said V P Shetty, CMD, Uco Bank.

"The fears of hardening interest rates have been removed. The increase has only been on the short-term rate and therefore we are not examining our deposit/lending rates at the moment," said K Cherian Varghese, CMD, Corporation Bank.

From the start of this fiscal, interest rates in the money markets have shot up by as much as 150 basis points, triggered by rising inflation. This has led to HDFC and State Bank of India raising their home loan rates in recent months, albeit marginally from their historic lows.

Since several months it was a given that interest rates had bottomed out but today RBI stated that the interest rate cycle had changed and raised the short term interest rate for the first time in four years.