Interest rates set to go up soon

Banks may soon raise lending as well as deposit rates with the Reserve Bank of India increasing repo rate, or the rate at which it lends to banks, by 25 basis points to 8 per cent. While trying to rein in the runaway inflation, the central bank, however, left the reverse repo rate unchanged.

The move, applicable with immediate effect, will put further pressure on liquidity that is already under strain with the first instalment of advance tax due on June 15.

While the State Bank of India has already raised deposit rates earlier this month, the additional pressure on liquidity may force other players to follow suit.

SBI's asset-liability committee is scheduled to meet on Friday to review the market conditions and the rates, the bank's Chairman Om Prakash Bhatt said.

Union Bank of India Chairman & Managing Director M V Nair said that the bank may review rates next week, while Vijaya Bank is due to look at the possibility of an increase later this week. Bank of India too said it will review rates but did not indicate a date.

Private banks are taking a wait and watch approach. ICICI Bank Joint Managing Director Chanda Kochhar said the liquidity situation continues to be neutral. ICICI Bank will monitor the impact of this hike and take a decision at an appropriate time."

HDFC Chairman Deepak Parekh told a television channel that the cost of borrowing will go up but a decision on interest rates was linked to liquidity conditions.

"Most of us change interest rates on the first day of the month. So, we at HDFC will look at it in the month of June and it will only be effective on July 1. We have a couple of weeks to take a view, looking at what our competitors are doing, the liquidity in the market and our margins because we have to protect them. If our cost of funds goes up, we have to increase the lending rates," he said.

The impact on home loans may not be immediate because of the low offtake. However, rates of unsecured and corporate loans could rise in the short term. "I expect a rise of 25-50 basis points in these loans for one-year tenure," Ashish Parthasarthy deputy treasurer at HDFC Bank, said.

The increase in the repo rate, the first change since March 2007, came as a bit of a surprise as the market was expecting the cash reserve ratio (CRR), or the proportion of deposits banks must keep with the central bank, to go up. Over the last two months, the central bank has tried to tighten liquidity raising the CRR in an attempt to tame inflationary expectations.

The CRR has been raised 75 basis points to 8.25 per cent but the impact has largely been absorbed by banks. It has also had little impact on the inflation rate, which touched 8.24 per cent at the end of the third week of May. The rate is expected to up to 9 per cent in the coming weeks after the fuel price increase.

In a statement, RBI said that the move on the repo rate is in line with its monetary policy statement in April that accorded high priority to price stability and had proposed to respond swiftly to global and domestic developments.

"Overall, interest rates may go up. The message is clear that banks should not lend in excess of their ability to access deposits," Nair said.

Bhatt said the move will put pressure on margins but added that he is confident of maintaining the net interest margin at 3 per cent.

"It is a signal that borrowing resources will be a costly matter and banks will have to take decisions on resources and growth on the basis of their balance sheet. We will not rush to revise the rates but will wait for a feedback from the market," added Punjab National Bank Chairman and Managing Director K C Chakraborty.

Bank of India Chairman & Managing Director TS Narayansami added: "This is a very strong signal that the cost of funds will go up and yields on government bonds will rise further. We will review the situation and decide on revising interest rates. The trend is definitely towards hardening of rates."

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