Interest rate cycle makes a U-turn

A day after the Reserve Bank of India’s first-quarter monetary policy review, banks have started raising interest rates.

Leading private-sector lenders HDFC Bank and Axis Bank on Wednesday announced an increase in deposit rates for shorter maturities, while YES Bank raised both lending and deposit rates.

Though RBI on Tuesday maintained the status quo on the key policy rate, its liquidity-tightening measures over the past fortnight have impacted the short-term rates.

As the central bank on July 15 capped banks’ borrowings under the liquidity adjustment facility and increased the marginal standing facility rate by 200 bps to 10.25 per cent, overnight rates breached 10 per cent.

These measures increased lenders’ cost of funds and they had said if these continued for more than a month, their margins would be severely affected.

If deposit rates are hiked, banks would have to increase lending rates to protect their margins.

HDFC Bank, the country’s second-largest private-sector lender, has increased deposit rates on maturities ranging from seven days to six months by 100 basis points, though it has reduced rates for deposits maturing between six months and one year by 75 basis points.

Axis Bank increased deposit rates for 30 days to 13 months by 50-225 bps. Both the banks kept their base rates unchanged.

The banks’ decision to increase short-term deposit rates is in line with the present objective of the central bank.

RBI Governor D Subbarao on Wednesday said the central bank’s intention now was to invert the yield curve.

“In that consequence, if long-term rates go up, that is inevitable and part of the process,” Subbarao said in a conference call with analysts and researchers.

He, however, said, it was difficult to define in objective terms at what point there was a shift in the policy stance.

“We will use all instruments available to us,” Subbarao said, referring to RBI’s intention to curb the rupee’s

volatility. “But we will use those judiciously.”

“We raised the MSF rate mark up to 300 bps above the repo rate because we wanted to make the short-term money costlier and scarcer.

The idea was to invert the yield curve and raise the interest rates at the short end. It has transformed to be an effective instrument,” Subbarao added.

ICICI Bank, the largest private-sector lender, said it would watch the market for some time before taking a decision.

“Market rates at the very short end has gone up. But the impact on our total cost of funds is small, because our dependence on short-term and wholesale deposits is limited.

Right now, it is too early to arrive at a conclusion (on increasing deposit and lending rates). We will watch the market,” said ICICI Bank MD & CEO Chanda Kochhar.

The RBI measures had put more pressure on banks with higher reliance on wholesale deposits, such as YES Bank and IndusInd Bank, analysts said.

YES Bank increased its base rate or minimum lending rate by 25 basis points to 10.75 per cent from August 1, 2013 and deposit rates by 25-50 basis points.

“This (deposit rate hike) is in line with peers and in sync with the market.

"So, according to the base rate methodology adopted by the bank, we have also increased base rate.

"However, this increase in rates, both on deposit and lending front, will closely follow RBI’s future course of actions.

"The bank does not rely on short-term funding.

"As we have publicly disclosed, more than 86 per cent of our deposits come from individual ticket size of less than 0.2 per cent of our deposit base,” said Rajat Monga, senior group president (financial markets) & CFO, YES Bank.

While most large public-sector banks have yet to take a call on rate revision, a couple of government-run lenders like Oriental Bank of Commerce and Punjab & Sind Bank had raised short-term deposit rates last week.