The Reserve Bank of India (RBI) hiked key rates by 25 basis points on Tuesday,which is being seen as the last such increase because of RBIs acknowledgement of slowing growth.The increase may prompt banks,which did not respond to the previous rate hike in September to now raise lending rates which would make home and auto loans costlier.
However,the likelihood of lending rates going up significantly from here is low,with banks being tentative about repricing their loans because of easing demand and a strong deposit growth. In its 13th straight increase since January 2010,the RBI increased the repo rate,the rate at which banks borrow from RBI,by 25 basis points to 8.5%.The repo rate hike will automatically push up the reverse repo rate (the rate at which banks park surplus funds with RBI) by the same amount of 25 bps.
What should bring a big relief to India Inc,weighed down under slowing growth,the RBI governor D Subbarao,announcing the rate hike,said: the likelihood of a rate action in the December mid-quarter review is relatively low.Beyond that,if the inflation trajectory conforms to projections,further rate hikes may not be warranted.The governor also lowered the GDP forecast to 7.6% from 8%,while retaining the inflation target at 7%.
Yes Bank was the first off the block,reacting by increase its lending rates.However,larger lenders such as SBI and HDFC Bank said they will take a call after studying the impact on their cost of funds.According to SBI chairman Pratip Chaudhuri,the present growth in deposits is enough to meet credit demand and unless there is pressure to increase deposit rates a rate hike looks unlikely. He also pointed out that bank deposits are now getting a further boost because they have reached a tipping point,where they now offer better returns than the small saving schemes offered by the government.
RBI has freed interest rates on savings deposits.So far,about Rs 13 lakh crore of funds parked in SB (savings bank) deposits have been receiving negative real returns because the interest on these accounts has been fixed at 4% even as inflation was two-and-a-half times that level.Now savings rate deregulation gives people an opportunity to shift to banks that come up with better deals.
What does savings rate deregulation mean
Until now,interest on savings deposits was the rate prescribed by RBI (4% at present).Now banks are free to offer whatever returns they wish.Although savings deposits can be withdrawn without notice and interest rates are calculated on daily basis,a part of these deposits are perpetual.Partly because amounts withdrawn are replenished by monthly earnings and partly because banks mandate a minimum balance ranging between Rs 5,000 to Rs 10,000 on savings accounts. What is likely to be the outcome
Banks that are short of retail deposits like Yes Bank and IDBI Bank are in a better position to offer higher rates as their overall cost will not rise to that extent.Larger banks such as SBI and HDFC Bank may resist initially to prevent their overall cost of funds from rising.But if their customers respond to higher rates offered by rivals,they may be forced to follow suit.Given that the deregulation has come at a time when the interest rate cycle is close to its peak and banks are paying 8.5% for overnight money it is likely that return on savings deposit will rise.But if there is a slowdown in the economy and demand for credit slips,banks may even lower deposit rates from current levels. Can banks discriminate between large and small depositors
No.RBI has made it clear that the same rate will be applicable to all depositors up to Rs 1 lakh.However,for larger deposits banks can offer differential rates.At the same time,Reserve Bank of India has said two customers having the same amount should get the same rate. Will banks raise charges to make up for the cost
Banks say that accounts they may revisit charges in respect of accounts where they are losing money.However,RBI has already frozen charges on ATM usage.There is a possibility that banks may increase branch service charges to compensate for the savings rate outgo.
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