Joel Rebello & G Seetharaman

Mumbai: Bankers are in two minds on whether to hike their deposit rates or cut them, since the Reserve Bank of India’s monetary policy review last Tuesday.

Though RBI hiked the cash reserve ratio (CRR) by 25 basis points to 8.25% effective from May 24, the policy was not as harsh as bankers expected, as the central bank left key policy rates like the repo and the reverse repo unchanged.

Now, bankers are debating whether a change in deposit rates is due. Most banks are adopting a ‘wait and watch’ policy.

Some, like Bank of India, are clearly caught between two decisions. Late on Monday evening, a few hours after announcing an increase in deposit rates, the state-run bank said it was reviewing the rate-hike.

The bank had decided to hike deposit rates by 50-75 basis points in the 1-year to 5-year tenures. It has since put the decision on review, pointing out that benchmark bond yields have not risen as much as expected. However, customers can avail the new deposit rates for the time being.

Bank of India’s executive director K R Kamath said the bank had decided to review the rate-hike looking at the fall in government bond yields since the decision was taken.

“Our Alco (assets and liabilities committee) met before the policy on April 24 when the government security yields were 8.20%. The yields have since fallen by 40 basis points. We have to see if yields remain stable at these levels. The market is dynamic and we can’t wait for two months to review the decision. We will have to review it much earlier,” Kamath added.

Bank of India had earlier decided to keep the higher rates effective until June 30. Now, however, the bank is unlikely to offer such high deposit rates for too long.

Banks consider the yield on the 10-year government bond as a market-determined indicator of longterm interest rates. The yield is directly related to interest rates, so when the yield falls, banks tend to decrease their interest rates.

Besides Bank of India, Kotak Mahindra Bank also hiked its deposit rates, a day before the RBI policy meeting on April 28, offering customers a rate of 8.50% per annum for deposits of 271 days to less than 1 year and 9.25% pa for deposits of 1 year to less than 5 years.

K V S Manian of Kotak Bank also said the rise in the 10-year yield before the policy announcement was the main reason the bank decided to hike deposit rates.

Now, Kotak too is looking at the fall in bond yields before taking any further decisions.

“There is no liquidity crunch among banks now,” Manian added. As a result, majority of the banks do not see the urgency to hike rates at this juncture.

ICICI Bank, HDFC Bank, Axis Bank and Bank of Baroda said they had no plans as of now to hike deposit rates.

Bankers are also watching the inflation situation for cues as any spike in inflation would force the RBI hand on interest rate hikes. Bank of Baroda executive director V Santhanaraman said the bank had no plans to hike rates currently.

However, analysts said there was a better possibility of a deposit rate cut in the current situation looking at the surplus liquidity with banks.

Vaibhav Agarwal, banking analyst with Angel Broking, said there was scope for cutting rates by 25-50 basis points as banks would look to cut costs post-CRR hike.

“There is enough liquidity and deposit growth at around 24% has also been good for the last 6-9 months. Banks are just in wait and watch mode,” Agarwal said.

Agarwal’s views were echoed by Deutsche Bank research analyst Suresh Ganapathy who pointed to the Rs 53,430 crore liquidity surplus with banks in the overnight money market.

Source : DNA