Hike in reverse repo rate not to hit margins

Global rating agencies today said the 25 basis points hike in reverse repo rate is not likely to affect interest margins of banks significantly.

Standard & Poor's said the reverse repo rate increase signals the general upward direction of interest rates and banks would increasingly need to be more vigilant of the quality of their loan assets, particularly during this current period of strong credit growth amid an environment of rate hardening.

Fitch Ratings India managing director Amit Tandon said the hike could lead to increase in the cost of short-term funds for banks and might affect their net interest margins if competition constrains their ability to pass on any increase in cost to the customers.

Tandon said the reduction in trading profits has put the spotlight on the quality of earnings of banks, and while increasing fee income will remain a long-term priority, banks are likely to remain focused on credit growth to support net income.

S&P said the reverse repo rate hike won't have a significant impact because the relatively small increase is not expected to translate into an immediate increase in banks' lending or deposit rates.

The reverse repo rate is the rate that commercial banks earn for funds parked with RBI.

Tandon said with interest rates expected to maintain an upward bias, market risk on banks' investments that are "held for trading" or "available for sale" will remain prominent.

This would affect the performance of primary dealers and banks, and the policy referred to discussions on permitting limited short selling in government securities.

It would be relevant to also try and increase the depth and liquidity of the interest rate derivatives market to make a wider range of hedging tools available to the market participants.