Short-term deposit interest rates to rise

A day after the 25 basis points repo rate hike, bankers said rates for short-term deposits and loans would climb soon.

State Bank of India Chairman AK Purwar said short-term deposit and lending rates might go up but banks' prime lending rates would remain unchanged for now.

HDFC Bank said it would increase its short-term deposit rates by 25-50 basis points soon. "Our asset liability committee will meet next week and increase the deposit rates," said Samir Bhatia, country head (corporate banking), HDFC Bank.

The second largest bank in the country, ICICI Bank, is more cautious. "It is too early to take a decision on deposit rates. We will watch the costs and take a call soon," said Chanda Kochhar, executive director, ICICI Bank. The bank may call an asset liability committee meeting soon.

"The rates on fresh loans in the corporate loan market have already gone up. Even AAA corporates, which were borrowing at the Mumbai interbank offer rate (MIBOR) plus 25 basis points, are now borrowing at MIBOR plus 75 basis points," said Bhatia.

MIBOR-linked loans are popular short-term loans available to large corporates. MIBOR is the average rate of the call money transactions between 22 prominent players in the market. Reuters calculates the rate every evening.

MIBOR-linked loans are used by corporates to adjust their daily cash flow with daily put and call options. The rates on these loans are reset every day in tune with the ruling MIBOR rates. The MIBOR-linked loan market is very active and its size is estimated to be Rs 15,000-20,000 crore (Rs 150-200 billion).

Said a general manager in a large public sector bank, "The mark-up for all corporate loans has increased by 20-25 basis points in addition to the rise in the reference rate, MIBOR. Term loan rates will automatically go up by 25 basis points following the repo rate hike."

"The full impact of the rise in rates will be felt only after a fortnight when funds locked into old rates free up and are given out at the new higher rates," he said.