Interest rate cycle takes a U turn with banks start hiking rates

YES Bank hikes base rate; HDFC Bank, Axis ups deposit rates

A day after the monetary policy, banks have start increasing interest rates, with leading private sector lender HDFC Bank and Axis Bank hiking the deposit rates of shorter maturities and YES Bank increasing both the lending and deposit rates.

Though the Reserve Bank of India (RBI) maintained status quo in the first quarter review of monetary policy but the liquidity tightening measures introduced a fortnight back has impacted the short term rates. Overnight rates breached 10% following RBI steps which capped bank’s borrowing under the liquidity adjustment facility and hiked the marginal standing facility rate by 200 bps to 10.25%.

These measures increased the cost of funds for the banks, and bankers had said if these continue for more than a month or so, their margins will be severely affected.

If deposits rates are hiked, banks will have to hike the lending rates, in order to protect their margins.

HDFC Bank, the second largest private sector lender in the country, has increased deposit rates on maturities ranging from seven days to up to six months by 100 basis points though reduced rates on deposits maturing between six months to one year by 75 basis points. Axis Bank increased 30 days to 13 months deposit rates by 50-225 bps. Both the banks have kept their base rate unchanged.

The banks’ decision to hike short term deposit rates is in line with the present objective of the central bank.

RBI governor D Subbarao today said that the central bank’s intension now is to invert the yield curve. 'In that consequence if long-term rates go up, that is inevitable and part of the process,' Subbarao said in a conference call with analysts and researchers.

Subbarao, however, said, it is difficult to define in objective terms at which point there is a shift in the policy stance. RBI had adopted a pro-growth stance as it has reduced the repo rate by 25 bps each in three consecutive occasions in 2013 but paused thereafter as the rupee weakened sharply which put pressure on prices.

'We will use all instruments that are available to us,' Subbarao said referring to curb the rupee volatility. 'But we will use them judiciously,' he said.

'We raised the MSF rate mark up to 300 bps above the repo rate because we wanted to make the short-term money costlier and scarcer. The idea was to invert the yield curve and raise the interest rates at the short-end. It has transformed to be an effective instrument,' Subbarao added.

ICICI Bank, the largest however said it will watch the market for some time before taking a decision.

'Market rates at the very short-end has gone up. But the impact on our total cost of funds is small because our dependence on short-term and wholesale deposits is limited. Right now it is too early to arrive at any conclusion (on increasing deposit and lending rates). We will watch the market,' Chanda Kochhar, managing director and chief executive officer of ICICI Bank, said.

The RBI measures had put more pressure on banks which had higher reliance on wholesale deposits like YES Bank and IndusInd Bank, analysts said.

YES Bank increased its base rate or minimum lending rate by 25 basis points to 10.75 per cent from August 1, 2013 and deposit rates by 25-50 basis points.

'This (deposit rate hike) is in line with peers and in sync with the market.  Consequently, as per base rate methodology adopted by the bank, we have also increased base rate. However this increase in rates, both on deposit and lending front will closely follow RBI's future course of actions...The bank does not rely on short-term funding. As we have publically disclosed, more than 86 per cent of deposits come from individual ticket size of less than 0.2 per cent of our deposit base,' Rajat Monga, senior group president - financial markets and chief financial officer of YES Bank, said.

While most large public sector are yet to take a call on rate revision, couple of governmentrun lenders, like Oriental Bank of Commerce and Punjab & Sind Bank  had hiked short term deposit rates last week.