SBI to review rates if liquidity curbs continue over 3 weeks

State Bank of India (SBI) could withstand the liquidity-tightening pressure for two-three weeks, before deciding to pass on the impact to customers.

In the last fortnight, RBI has taken a series of steps, including capping bank borrowings from the central bank's liquidity adjustment facility and increasing the marginal standing facility rate by 200 basis points to make the rupee expensive and contain exchange rate volatility.

"Two-three weeks is something we have as a normal waiting period. After that, we have to take a view (on rates)," SBI Chairman Pratip Chaudhuri told reporters on Tuesday. "It would depend on redemption pressure (from mutual funds) also," he said, adding, loan demand was weak. "We are waiting because these steps are supposed to be temporary, and let us believe in that," he said, adding unless the RBI steps lingered for very long, no bank would increase loan pricing. He said banks didn't rely on day-to-day money much, adding they had resources such as term deposits and current account and savings account deposits. Banks could wait to pass on the impact, he said.

RBI believes excess liquidity in the system is leading to speculation in the foreign exchange market, resulting in depreciation of the rupee. As a result, short-term rates spiked, with overnight rates rose to double-digit levels. "Short-term costs have, in any case, gone up for banks... what happens to long-term rates really depends on the time period," said Chanda Kochhar, managing director and chief executive, ICICI Bank.

Shikha Sharma, managing director and chief executive of Axis Bank, said, "Ultimately, you have to look into the total impact on the cost of funds to banks, and it only changes marginally…As of now, we don't feel the need to raise rates immediately." She said "short-term borrowings are a small proportion of total bank borrowings." adding the cost of funds changed very slowly and the situation had to be monitored before taking any decision.

After RBI had announced steps to squeeze liquidity, banks such as Oriental Bank of Commerce and Punjab & Sind Bank had raised short-term deposit rates. However, none of the big banks have raised deposit rates yet.