Interest rates on both deposits and loans are unlikely to fall in the short-term. But that’s not the news.
Regardless of whether the RBI maintains status quo on Thursday, chances are, rates will spike given the tightness in liquidity due to stronger credit growth, subdued deposit growth and hardening long-term bond yields.
As it is, average deposit rates rose 50 basis points (bps) among private lenders and 25 bps for PSBs in 2018, while average lending rates rose 60 bps for private banks and fell 20 bps for PSBs in 2018. Given the non-transmission of strong reserve money and currency in circulation into money supply, an upward trend in both lending and deposit rates will likely continue, say sector analysts.
According to brokerage Anand Rathi, scaling down of open market operations (OMO) by the central bank too could lead to a faster rise in bank interest rates. Aggressive OMO by RBI is keeping the banking sector’s
liquidity neutral and the call rate within the LAF corridor.
Yet, with strong demand for funds, interest rates are rising in the credit market and at the longer end of the debt market. The lending rate of PSBs continues to fall while rising sharply for private banks. In response, private banks are raising FD rates faster than PSBs, it added.
Analysts expect RBI to retain status quo, though some don’t rule out surprises for two reasons. One, headline inflation is benign and two, credit growth declined for the second fortnight in January, implying that incremental credit growth data is showing significant decline, which might have continued in January. This is not encouraging and is evident for services, despite improvement in credit to NBFCs in December.
Going by monthly trends, it’s evident that both deposit and lending rates are already on an upward trajectory among PSBs. Interestingly, there’s a marked rise in effective rates and though the rise in the base rate was a modest 15 bps since January 2018, the MCLR rose by up to 60 bps. On the other hand, private banks appear pro-active and, since late 2017, they have increased their weighted average FD rates by 50 bps, while PSBs increased this only by half as much. If the weighted average lending rate of private lenders rose by over 60 bps since January 2018, among PSBs it fell by 20 bps.
Broadly though, banks raised FD rates in line with the repo rate. MCLR rates too have risen more and continue to spike, indicating delayed pass-through and relatively tight credit market conditions for deposits. For instance, given RBI’s policy rate hike by 50 bps in 2018, average FD rates rose by the same amount, but MCLR rose 60 bps.
Meanwhile, with improving banking sector liquidity, call rates remain within the repo/reverse-corridor and with steepening of yield versus the bank interest-rate curve, the spread of MCLR over the risk-free rate is falling while the spread between FD rates and short-term gilts turns positive — a turnaround of over 100 bps since October, 2018, the agency noted.