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India Economics
Another Round of Deposit Rate Hikes
Banks announce another round of deposit rate
hikes: The State Bank of India (SBI, India’s largest
public sector bank) raised deposit rates by another 50
bps across maturities. In the 1-2 year bucket (using
555-day deposit as benchmark) SBI has increased rates
by 50 bps to 9%. Note this is in addition to the 100bps
hike announced by the SBI in early December. In
general, we think other public and private sector banks
are likely to more or less match the SBI's deposit rates.
Lending rates hiked too: SBI increased its prime
lending rate (PLR) by 25 bps and base rate by 40 bps.
Similarly, other banks including ICICI Bank (25bps hike
in PLR and 50bps hike in base rate) and HDFC Bank
(25bps hike in base rate) have also announced lending
rate hikes.
Effective tightening continues: Even as RBI has left
policy rates unchanged, banks continue to hike deposit
and lending rates. Indeed, SBI's 555-day deposit rates
are now at the peak levels excluding the credit crisis
period of June-December 2008. The spread between
deposit rates and repo rates is now at the highest levels
seen during the rising rate environment.
Banks forced to respond with deposit rate hikes
with a lag: Slow response from the Reserve Bank of
India (RBI) had meant banks delayed deposit rate hikes
even as inflation expectations were rising. Low real rates
had resulted in deposits growing at 14.7%YoY vs. credit
growth of 23.7%YoY as of the fortnight ended December
17, 2010. Over the last two months, RBI has been
injecting an average of US$24 billion daily to manage
tight inter-bank liquidity.
Inter-bank rate has been above repo rate for last 3
months: Even RBI has announced a number of liquidity
measures and has been injecting liquidity at repo rate;
call rate has been persistently higher than repo rate in
the range of 6-6.7%. This is now forcing banks to manage their
liabilities and better trying to increase deposit growth.
Inter-bank liquidity should improve over the next 2-3
months: We believe the recent aggressive hike in deposit
rates should start improving deposit growth and reduce
tightness in inter-bank liquidity over the next 2-3 months.
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