Banks likely to raise lending, deposit rates in Oct

The Reserve Bank of India for the fifth time has raised the repo and reverse repo rates by 25 basis points and 50 basis points. The impact of this hike will be visible on lending and deposit rates. But bankers indicate that the hike in lending and deposit rates will not come into effect before October as credit growth has yet to pick up.

Most probably banks will raise deposit rates first as there is a need to improve the sluggish deposit growth. Later lending rates will be raised.

Mr M.V. Nair, Chairman and Managing Director, Union Bank of India, said deposit rates will be raised to incentivize savers.

He added, “Deposit growth is lower than the RBI's projection. If it continues to be low, it cannot support the credit growth, which will pick up in the busy season. So, the priority at this point of time has to be deposit growth.''

Mr M.D. Mallya, CMD, Bank of Baroda, said a clear message has been received from the RBI’s move that interest rates will move upward. But the lending rates will not be raised unless credit starts picking up.

He added, “It is also possible that deposit rates may go up first, and then the lending rates, subject to credit demand. A hike in rates may not happen immediately as we have just tweaked the rates.”

Mr D. L. Rawal, CMD, Dena Bank points out, in the third quarter which will begin from October, banks will raise only deposit rates as banks might face some liquidity pressure due to credit pick-up.

He added, “Once credit picks up in the third quarter, we will have to up interest rates on term deposits.”

Mr Nair said, in the festive season, the credit demand is likely to pick up so the banks might review their base rates in October, before raising the rates.

While Mr Rawal says, the banks will raise base rate in the January quarter only.

“Given that credit growth has been lacklustre in the second quarter, banks may not revise the base rate. Status quo on the base rate will encourage credit growth during the festive season. Base rate, however, will get revised in the fourth quarter as banks will take into account the deposit rate hikes effected in the previous quarters,'' Mr Rawal said.

Mr Mohan Shenoi, Group Head, Treasury, Kotak Mahindra Bank explained it has been a long period that banks have been under tight liquidity pressure which has increased borrowing cost of banks therefore at some stage banks have to transmit it to borrowers through a review of the base rate.