Deposit rates may have peaked, but loans likely to cost more

Following the rise in key policy rates by the Reserve Bank of India (RBI), banks are expected to raise lending rates. However, deposit rates may have peaked already, according to bankers.

The central bank has raised the repo and reverse repo rates by 25 basis points (bps) each to tackle inflation. Also, based on the evolving growth and inflation scenario, RBI is likely to persist with its anti-inflationary stance.

“Deposit rates may not rise as there has been a substantial increase over the past few months. However, banks may pass on the increase in lending rates to customers if there is a demand for loans in April. Policy rates have risen more than the lending rates. So, there is room available... maybe about 25 bps,” said M V Nair, chairman and managing director, Union Bank of India.

Since October, most public sector banks have raised the base rate, the benchmark rate for loans, by 150 bps to 9.5 per cent. As a result, the effective lending rates for home loans and even the highest-rated corporate loans are more than 10 per cent now. Deposit rates, on the other hand, have increased by 250-300 bps.

Some banks are considering raising lending rates this month itself. This is because loan demand is expected to decline April onwards.

“With respect to the policy, the take away for bankers is that interest rates increases will happen more sooner than later. We will give it a serious thought. Also, if we want to raise lending rates, we will do it before the end of March. Though there has been a pass-through in deposit rates, some more can happen on lending rates,” said Romesh Sobti, managing director and CEO, IndusInd Bank.

With the rise in lending rates, loan growth started moderating from December. However, for the current financial year, it is expected to stay more than what the central bank had projected. It was 23 per cent on-year till February, higher than the central bank’s projected trajectory of 20 per cent. On the other hand, deposit growth was 16.4 per cent, lower than the 18 per cent projected by RBI.

Crisil Research expects credit growth to moderate to 18-19 per cent in 2011-12, thanks to the decline in the growth of investments across sectors like telecom, airport infrastructure, cement and petrochemicals. “Also, the prevailing high interest rates are likely to impact the credit growth of the industry as well as the retail segment,” Crisil said.

Banks expect RBI may continue to hike rates and they may have to hike interest rates for a few more rounds in response to RBI’s rate action, if inflation continues to stay high.

“Going ahead, there are upside risks to inflation. Further action may be warranted if inflation continues to stay high,” Sobti said.

“Money market conditions will remain tight for the next few weeks,” said TCA Ranganathan, chairman and managing director, Export Import Bank of India. Short-term money market rates might move up, he added. However, he did not elaborate on the quantum of increase.

Source: Business Standard