Bank depositors can hope to earn more soon even as loans could get dearer with the Reserve Bank of India nudging up benchmark short-term rates by a 25 basis points in an attempt to exorcise the demon of inflation.
After leaving the policy rates unchanged in the Mid-Quarter Review of December 2010, the RBI decided to resume monetary tightening as “the balance of risk has tilted towards intensification of inflation”. Consequently, the interest rate that banks pay to borrow from the RBI's repo window has been upped to 6.50 per cent (6.25 per cent earlier) and the interest rate they earn for parking surplus funds at the RBI's reverse repo window has been increased to 5.50 per cent (5.25 per cent).
Deposit and credit growth
That the central bank's primary worry is the rising credit growth that is outpacing deposit inflows became clear with the Governor, Dr D Subbarao, telling banks that they must increase deposit rates and restrain credit growth. Year-on-year non-food credit growth in December 2010 at 24.4 per cent was much above the RBI's indicative projection of 20 per cent. Deposit growth at 16.5 per cent was lower than the projected 18 per cent.
The central bank's price front worry also got reflected in the sharp upward revision in its March 2011 baseline projection of wholesale price index based inflation to 7 per cent from 5.5 per cent.
Mr M V Nair, CMD, Union Bank of India, said: “The key concern for banks is the mobilisation of deposits to support credit growth. As of December 31, deposit growth was 16.5 per cent. It may reach 18 per cent by March. If it doesn't, then we may have to raise deposit rates. This will push up the base rate, thereby increasing the lending rates,”
There could be more rate hikes in the next few months as WPI inflation is unlikely to moderate in 2011-12 first quarter.
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