RATE HIKES SEEN COMING, BUT DEPOSITS FIRST

With the Reserve Bank of India hiking repo and reverse repo rates by 25 basis points, banks are likely to increase lending and deposit rates in the near term. However, with banks looking to increase their deposit mobilisation, deposit rates are likely to go up before lending rates.

Mr O. P. Bhatt, Chairman, State Bank of India, said the bank's asset-liability committee will meet soon to take a call on the increase in rates.

Upward bias

“There has been an upward bias in rates for a very long time and you have seen this bias getting translated into increases in lending and deposit rates. But there has been a small lag between the rate hike and the transmission. It will depend on where each bank is on the liquidity curve and its asset-liability situation”, Mr Bhatt, who is also the Chairman of Indian Banks' Association.

Ms Chanda Kochhar, MD and CEO, ICICI Bank, said there is an upward bias in interest rates.

“Deposit and lending rates increase depends on how cost of funds is moving and what is the supply-demand situation. Cost of deposits has been moving up. So clearly there is an upward bias in interest rates. But when and how much will vary from bank to bank,” she said.

Mr K.R Kamath, Chairman and Managing Director, Punjab National Bank, said there is a need for a balance between deposit and credit growth rates as the pace of the growth is not the same.

“There is case for an increase in lending and deposit rates. When and how, the market will decide. In case banks are not getting deposits to fund the credit growth, then deposit rates will be increased first”, he said.

Mr Anil Kothuri, Head-Retail Finance, Edelweiss Capital, pointed out that even though the RBI has increased interest rates six times in 2010 aggregating 300 bps, home loan interest rates have increased by only 150 bps.

“The latest increase will put upward pressure on home loan interest rates, given that bank and housing finance companies have very little wiggle room left. Nonetheless, the demand for home loans will continue to be strong, if property prices stay stable and the environment continues to be buoyant,” he said.

Mr M.V. Nair, Chairman and Managing Director, Union Bank of India, said the RBI wants the incremental growth in the repo rate to be passed on to the credit market.

“The intent of the policy is absolutely clear. Deposit has to keep pace with the growth in credit,” he said.

SOURCE: http://www.thehindubusinessline.com/todays-paper/tp-money-banking/article1125548.ece