Idbi Bank Kicks Off Short-Term Rate Cuts

The package announced by the RBI yesterday sparked off an immediate response with IDBI Bank hiking its short-term lending rate by two per cent. IDBIs new rate for deposits of 30-90 days now stand at nine per cent, 91-180 days at 10 per cent and 181 days-one year at 11 per cent.

The State Bank of India (SBI) also responded by reducing interest rates on dollar deposits for two- and three-year maturity with effect from January 19. It has been decided to realign the interest rate for US dollar deposits for two- and three-year maturity with the prevailing Libor/swap rates as per the directive of the RBI, an SBI statement said yesterday.

 

With effect from January 19, the FCNR(B) dollar deposit rate for two- and three-year maturities has been cut to 5.25% from the current 5.50%, it said.

The RBIs move to hike the bank rate by 200 basis points to 11% is expected to lead to a rise in the prime lending rates of other banks and FIs. Consequently, the cost of funds (term deposit rates) are also expected to move up in tandem with the PLR hike.

The interest on domestic term deposits of 30 days and above, up to one year, cannot exceed the bank rate minus two percentage points. With the bank rate at 11%, the deposit rate is expected to move up from 7% to 9%.

At present, the PLR of leading banks is ruling at 13%, which is likely to increase to 14.5-15% by next week, as the RBI has hiked the bank rate with immediate effect, said senior bank officials.

Consequently, SBIs long-term PLR for loans above three years, which is linked to the bank rate, has moved up to 14.75 per cent from 12.75 per cent.

The boards of leading banks are expected to meet next week to revise their deposit rates and PLR. FIs too are expected to hike their term lending rates next week.

According to a top bank executive: The rise in the lending rates coupled with the hike in cash reserve ratio will see a demand for credit but, on the other hand, supply is likely to get exhausted, leading to a severe liquidity crunch.