Mumbai: Banks are expected to hike lending and deposit rates after the Reserve Bank of India on Tuesday increased the cash reserve ratio and repo rate. While signalling that the days of high inflation are far from over, the RBI is also indicating that credit growth continues to be beyond the RBI’s target levels.
While a hike in rates was expected, given the high inflation, the degree of the hike was a surprise, said bankers.
“Even though we expected a rate hike to anchor inflationary pressures, the hike was slightly beyond our expectations. Credit growth will decelerate, as funds have become dearer,” said Mr M.D. Mallya, Chairman and Managing Director, Bank of Baroda.
The rate hike would put pressure on margins of banks. “The obvious impact of the drastic rate hike measures would be additional pressure on the banks being forced to borrow overnight funds (for managing day-to-day liquidity requirements) at 9 per cent, in a situation where visible liquidity is tightened; and moreover, having to sacrifice further amounts in non-remunerative CRR balances,” said Mr Joydeep Sen, Vice-President, Advisory Desk, BNP Paribas Private Banking.
Biding time
According to Ms Chanda Kochhar, Joint Managing Director of ICICI Bank, we have to live with the challenge of inflation and the pain for some time.
“While we cannot predict a hike in rate, it is definitely a possibility. The cost of lending will go up. So, both lending and deposit rates will go up. We will wait and watch,” she said.
Most bankers agree that the retail segment, particularly personal and consumer loans, would see a slowdown due to rising rates.
Mr Romesh Sobti, Managing Director and Chief Executive Officer, IndusInd Bank Ltd, said, “Deposit rates are expected to range between 9.75-11.25 per cent across 90 days to 1 year tenure, which will squeeze the ‘spread’ of financial intermediation. Banks need to hike benchmark prime lending rates by a minimum 50 basis points to reduce this impact.”
More tightening likely
Mr Neeraj Swaroop, Regional Chief Executive (India and South Asia), Standard Chartered Bank, said that one must be prepared for further tightening in monetary policy going forward, as it is determined to bring inflationary expectations under control. “The RBI has signalled that banks too must restrain lending and ensure stringent risk management practices while extending funds,” he said.
