2 hrs ago
Ample Liquidity May Delay Banks’ Deposit Rate Hikes
The Reserve Bank of India raised its main interest rate by 25 basis points.
But banks have a lot of money available, so they may not need to offer savers higher rates right away.
Experts expect deposit rates to respond only after some of that extra money is absorbed.
The central bank is using tools such as bond sales and reverse-repo operations to reduce the surplus.
Governor Sanjay Malhotra said the surplus is not expected to last for a very long time.
Some loans tied directly to an external benchmark may adjust faster than other rates.
Overall, the rate increase may take time to affect what savers earn and borrowers pay.
The RBI raised its repo rate by 25 basis points, to 5.50%.
Surplus liquidity has reduced banks’ immediate need to compete for deposits by raising rates.
Liquidity reached ₹11.16 lakh crore on September 6 and stood at ₹4.98 lakh crore on October 6, according to the second report.
RBI Governor Sanjay Malhotra expects much of the surplus to be absorbed during the current financial year.
Experts said deposit rate changes may take months, while lending-rate transmission may differ for loans linked to external benchmarks.
- Who
- The Reserve Bank of India, Indian banks, and depositors and borrowers.
- What
- A 25-basis-point repo rate increase may not lead to immediate bank deposit rate hikes because liquidity is abundant.
- Where
- India.
- When
- The rate increase was announced on Wednesday; the reports cite liquidity figures through October 6.
- Why
- Banks have ample liquidity and therefore face less immediate pressure to attract deposits by raising rates.
Key facts
- Repo rate increase
- 25 basis points, bringing the repo rate to 5.50%.
- Liquidity peak cited
- ₹11.16 lakh crore on September 6, according to the second report.
- Liquidity on October 6
- ₹4.98 lakh crore, according to the second report.
- Weighted average call rate
- 5.37% on Wednesday, 13 basis points below the new repo rate.
- Expected deposit-rate timing
- Experts said increases could begin after liquidity is absorbed; one forecast changes only after December, depending on conditions.
- RBI liquidity tools
- The reports cite variable rate reverse repos, open market operations, and forex or sell-buy swaps.
- Credit growth
- The first report said system credit was growing at more than 18% year-on-year as of September 15.
Quotes
Sachin Sachdeva
Vice-president and co-group head of financial sector ratings at ICRA
“Transmission will likely be slower, except for loans directly linked to the external benchmark lending rate (EBLR), which must adjust faster. Given the surplus liquidity in the system, the weighted average call rate (WACR) remains relatively low, so transmission will remain muted until liquidity gets deployed or the RBI steps up its liquidity mop-up.”
financialexpress.com
“A rate hike while maintaining a liquidity surplus creates counteracting forces that work against each other, so calibrated tightening was required. I expect liquidity to remain moderately in surplus till December. Deposit rates are likely to change only after December, depending on the liquidity conditions at that time.”
financialexpress.com
Sources
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