Mumbai, Sept. 20: Bankers are planning to raise lending rates once again.
RBI governor Raghuram Rajan had been hoping to head off such a possibility. While raising the repo rate by 25 basis points to 7.5 per cent, he also slashed the marginal standing facility (MSF) rate by 75 basis points to 9.5 per cent. He was hoping that the rate rejigs would cancel the effects and end the need for a lending rate hike.
“The intent of the policy today is to say that the cost of funding is very high. We need to withdraw these liquidity (tightening) measures as soon as the markets allow it...immediately there will be a reduction in the cost of funding to the financial sector,” the RBI governor said.
He said he expected banks to pass on the reduction in their cost of funds to the borrowers by setting their rates “appropriate to the cost of funds”. But bankers aren’t quite reading the situation in the same way.
Sources at the SBI, the country’s largest bank, said it may have to raise lending rates again because of the hike in the repo rate. The tight liquidity conditions and the fact that the festive season was round the corner were also trotted out as reasons. They indicated that any such increase would be marginal and limited to around 10 basis points.
On Thursday, the SBI had increased the spreads on auto and home loans by as much as 0.20 per cent, which will affect new borrowers. A senior official with a leading private sector bank echoed the view.
Banking mavens said the rise in the repo rate would force banks to first raise their deposit rates and then hike their lending rates.
Recent data from the central bank showed bank deposit growth at a little over 13 per cent, while credit growth for the fortnight ended September 6 rose by around 18 per cent.
Liquidity in the system has been tight due to measures taken by the RBI since mid-July to prevent a sharp volatility in the rupee-US dollar exchange rate. The central bank has restricted banks’ access to the repo window to 0.50 per cent of their deposits and this has forced lenders to access the more expensive marginal standing facility (MSF) window.
“With the repo rate going up, MSF rate coming down and the minimum daily maintenance of CRR declining to 95 per cent, it is a mixed bag for the banks. India Ratings does not expect any cut in the base rate of the banks. On the contrary, in select cases it might actually go up,” said Devendra Kumar Pant, chief economist & head — public finance, India Ratings.
Banks have tended to raise lending rates whenever the repo has been hiked and been reluctant to cut their rates when the repo has been trimmed. The RBI had a tightening phase of about 19 months between March 19, 2010 and October 25, 2011 when it raised rates by 375 basis points. The lending rates of banks rose by nearly the same margin during that period. But when the easing phase began — a 13-month period between April 17, 2012 and May 3, 2013 — the repo rate was cut by 125 basis points, the banks cut their rates by about 40 basis points.
during this period, prompting finance minister P. Chidambaram to tell the chief executives of banks recently that they still had some headroom to cut rates. Banks have, however, claimed that their cost of funds have gone up because of the liquidity crunch, leaving them with no option but to keep lending rates high.