HDFC Bank hikes FD rates by up to 0.75%; loans to be dearer

A day after Reserve Bank of India (RBI) tightened the monetary policy, leading private sector lender HDFC Bank decided to raise deposit rates by up to 0.75 per cent today.

The deposit rate hike by HDFC Bank and similar plans by other banks, would translate into a hike in lending rates soon making auto, home and commercial loans more expensive.

Country's largest bank State Bank of India (SBI) too indicated that it could raise its deposit rates by at least 0.25 per cent in August-September, even as smaller lender Lakshmi Vilas Bank announced increasing deposit rates by up to 0.50 per cent.

While HDFC Bank will provide higher rates to its depositors from July 30, Lakshmi Vilas Bank will hike rates from August 2.

HDFC Bank will offer 5.25 per cent interest, up from 4.5 per cent, on fixed deposits between 91 days and 6 months and 6.5 per cent (existing 5.75 per cent) between nine months and one year.

Although the higher rates would increase the returns for depositors, they would increase the cost of funds for the banks which will ultimately be neutralised by charging higher rates from loan seekers.

"There is an upward bias on the deposit rates. (Rates should move up) by August-September by at least 0.25 per cent," SBI Chairman O P Bhatt told reporters in Mumbai.

Bhatt, however, ruled out any impact on SBI's margins owing to the likely jump in the deposit rates, as loan growth is also likely to pick up in the days ahead on the back of recovery in the economy, which would help the lender maintain its margins.

"We expect credit to be dearer ... As credit demand picks up, we expect lending and deposit rates to go up," RBI Governor D Subbarao had said after raising short-term lending (repo) and borrowing (reverse repo) rates by 0.25 and 0.50 per cent respectively yesterday.

According to HDFC Bank Executive Director Paresh Sukthankar, the rate hike was logical as the banking system is expected to remain in marginally deficit situation coupled with expected strong credit growth in the coming days.

The economy is expected to grow at 8.5 per cent in 2010-11 as per the RBI projection and going forward loan growth would pick up, Sukthankar said.

Asked if it would translate into higher lending rate, he said, "It would not immediate, but as we move along short term lending rates would go up. I do expect the lending rates would reflect this in the next few weeks."

However, it would not mean change in the base rate which was fixed in beginning of this month, he said.