Bhatt says policy rate hike may not impact cost of funds.
State Bank of India (SBI), the country’s largest lender, may hold on to its rates even if the Reserve Bank of India (RBI) raises key policy rates in its mid-term review of the annual policy tomorrow.
“The major component in the base rate formula is the cost of resources. The base rate will go up only if this goes up. So, just because RBI raises rates, the cost (of resources for banks) may not go up,” SBI Chairman O P Bhatt said.
Base rate is the benchmark lending rate for banks, which is a cost plus loan pricing model.
According to Bhatt, current and savings account (Casa) deposits, or the low cost deposits, constitute 50 per cent of the bank’s total deposit as on date, indicating that any rise in policy rates will have a marginal impact on SBI’s overall cost. At 50 per cent, SBI has one of the highest share of Casa deposits among Indian banks.
As of June end, the casa ratio stood at 47.51 per cent, an improvement of 906 basis points (bps) in one year. Casa growth of the country’s largest bank was 28.93 per cent year-on-year. Also, it had a deposit base of Rs 8,15,297 crores. RBI had increased the key policy rates by 125-175 bps and the cash reserve ratio by 100 bps between February and September. In response, most banks hiked their base rate by 10-50 bps. SBI hiked its base rate by 10 bps to 7.6 per cent.
“Transmission mechanism in the country is not very fast, it happens with a lag effect,” Bhatt said.
On the possibility of another round of rate rise by the central bank, Bhatt said such a decision would depend on the growth inflation trade off. “If you look in the context of inflation vis-à-vis growth, tomorrow’s monetary policy decision that the RBI has to take is not easy. Of late, there has been some tightening going on and that is fairly evident. Though the inflation has come down, it is still not at a comfortable level. It is a tussle. RBI may go in for a status quo or may increase rates by at least 25 bps. Both possibilities are there.”
In its macroeconomic and monetary development report on Monday, the central bank said, “Despite moderation in recent months, elevated WPI (wholesale price index) and CPI (consumer price index) inflation remains a challenge for the monetary policy.”
