Banks soon to announce hike in interest rates

Banks will be soon announcing hike in rates in view of hike in the repo rate by 25 basis points to 8% by the Reserve Bank of India (RBI). Interest rates will be moving upward soon.
OP Bhatt, chairman, State Bank of India, the country’s largest bank, said: “We have called a meeting of our ALCO on Friday and may take a decision on our lending as well as deposit rates. The repo rate hike by the RBI has definitely put pressure on the pricing of our money.”

On the other side the country’s second largest lender ICICI bank is not in a hurry to do anything at present. Chanda Kochhar, joint managing director, ICICI Bank 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”.

MV Nair, CMD, Union Bank of India said: “I think overall, the interest rates will move up now due to the RBI step. We will take a call when our ALCO meets next week.’’

RBI has increased only the repo rate and left the reverse repo rate untouched; bankers believe that RBI has given a clear-cut signal that banks should manage their own liquidity. “If they borrow from the RBI, it will be costlier now. By doing it, the RBI has just adopted one of its many tools in the direction of controlling inflation,’’ he said.

MBN Rao, CMD, Canara Bank, said: “Immediately there may not be any impact on our lending rates, but in the short term, inter-bank lending rates like call money may be affected, which may move on the higher side.’’

Most of the bankers expected hike in repo rate. Rao said RBI announcement has come at the right time when inflation had exceeded the limit of 8% and money supply is on the higher side.

“Yes, it will help control inflation to a certain extent. But our worry is what will happen if inflation continues to be above 8% for some more time in future. While Canara bank’s 20% portfolio was in the lending sector, 31% portfolio was in the investment side which it can bring down by 6% to absorb the repo rate hike,” he explained. “This I can do even without passing it on to our customers,’’ he said.

For the time being home loan borrowers may not be hit by the hike. Keki Mistry, vice-chairman, HDFC, said: “We will... not do anything immediately and will watch the market for a week or two before revising our home loan rates. Actually, we will see our cost of funds before taking a call on interest rates.’’

Even the industry chambers did not expected the hike. Commenting on the increase in the repo rate by the RBI, Ficci said that the 25 basis point increase in the repo rate was expected as inflationary pressures were building up and inflation had touched 8.24% for the week ending May 24, 2008 .

However Ficci, is still repeating its stand that interest rate hike at this point is not advisable particularly when the tightening monetary policy stand of the RBI has had an adverse impact on industrial growth.

Larsen & Toubro chief financial officer YM Deosthalee said: “A 25 basis point increase in repo rate had already been discounted. This was expected, considering the pace at which inflation is rising. RBI had to take some action to control it. Investments are made over a long duration and are not decided on the interest rates prevailing at a point in time. So, I don't think we will see any cutback on capex plans by Companies.

“Basically, capital goods Companies decide to invest on the basis of capacities and take a long-term view. Companies in the consumer credit or retail business may feel the impact.''

Meanwhile Lehman Brothers Holdings Inc., Standard Chartered Bank and ICICI Securities are expecting inflation rate to rise by 9.5 %, the highest since 1995. Inflation is currently at 8.24%, near a four-year high. The increase in fuel prices announced on June 4 will be reflected in price data due for release on June 20....