RBI Pitches For Higher Deposit Rates

Unfortunately, banks look set to raise lending rates by October, too.
A day after the Employees Provident Fund Organisation trustees raised the interest rates on PF deposits by 100 basis points to 9.5 per cent, the Reserve Bank of India on Thursday signalled banks to raise deposit rates to attract investors who have been shifting to other instruments.
In its first ever mid-quarter monetary policy review, RBI said if bank credit was not to become a constraint to growth, real rates needed to move in the direction of encouraging bank deposits.
“The policy actions taken over the past three quarters were partly driven by the need to end the prevalence of negative real interest rates,” it said.
Interest rates are said to turn negative when the interest rate on deposits are lower than the prevailing inflation rate, eroding the value of depositors’ money. While inflation has been hovering in double digits, deposit rates have been in the range of 6-7.75 per cent in this financial year. As a result, banks have seen deceleration of deposit growth, as savers have been shifting to other instruments for higher returns.
Hinting at upward rise in deposit rates, S S Mundra, executive director of Union Bank of India, said: “There is a clear signal in the mid-quarter review of policy on deposit rates. There is probably need to rethink. The extent of revision would differ from bank to bank.”
Deposit growth has not exceeded 15 per cent since the second half of April, against RBI’s projection of 18 per cent deposit growth for the current financial year. Banks have mobilised Rs 44,396 crore in this financial year since April, while the incremental lending went up by Rs 1,10,996 crore.
Deposits grew 14.4 per cent year-on-year as of August 27. During the fortnight ended August 27, deposits mobilised by banks had gone up by Rs 38,658 crore.
Following the central bank’s cues from the first-quarter monetary policy review on July 27, as many as 40 banks had raised interest rates on short-term and medium-term fixed deposits by as much as 150 basis points. The central bank had asked banks to beef deposit mobilisation in the first-quarter policy review to avoid any asset liability mismatch.
Since March, RBI had raised the repo rates by 125 basis points this year to six per cent and the reverse repo by 175 basis points to five per cent.
Lending rates to rise
As a result of tight liquidity, home and auto loans are expected to go up but not immediately. Bankers expect the credit demand to pick up on the back of good monsoon and strong IIP (index of industrial production) growth in July.
“There is upward bias on lending rates since we have increased our deposit rates. We will revise rates when we review our base rate in October. There is definite indication for it go up and (this) depends on cost of funds,” said Bank of Baroda’s executive director, R K Bakshi.
Banks will review their base rate for the first time in October. Subsequently, interest rates for the home, auto and commercial sectors will increase.
“Banks are at the onset of the busy season. The credit pick-up would also shape the interest rate trend,” added Mundra.
“Borrowing rates will go up for consumers as well as for developers. For the projects that are already priced high, the impact in terms of demand erosion will be higher. We don’t see much impact on low-ticket sizes such as Rs 25-50 lakh purchases,” said Shobhit Agarwal, joint managing director – capital markets, Jones Lang LaSalle India.
“Tight liquidity scenario is expected to prevail, which will further strengthen the policy transmission and is expected to result in banks increasing their lending and deposit rates,” said Ashwin Parekh, partner, Ernst and Young.
By increasing the repo and reverse repo rates, RBI had further reduced the liquidity adjustment facility rate corridor to 100 basis points. This is expected to reduce volatility in short-term interest rates.
Credit had grown by 19.4 per cent on a year-on-year basis at the end of August 27 as against RBI’s projection of 20 per cent for the financial year. Outstanding bank credit stood at Rs 3351396 crore at the end of the fortnight.

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