Reversing trend: Axis Bank hikes base rate by 25 bps

Moneycontrol Bureau

After a slew of monetary tightening measures that led to a spike in short term lending rates, banks of late have started reversing the interest rate cycle from cutting to hiking. India's third largest private sector lender Axis Bank on Monday emerged as the first big bank to hike its base rate by 25 bps to 10.25 percent per annum.

Banks cannot lend below the base rate or the minimum lending rate. Lenders price their loans adding spread over and above their respective base rate.

"It all depends on our cost of funds and short term rates are only a portion of that. Currently, I do not see any need to raise rates immediately," Shikha Sharma, Managing Director and CEO of Axis Bank  had said immediately after the RBI first quarter monetary policy on July 30.

Last week, India's largest private sector lender ICICI Bank had increased its short term deposit rates (46 days to 389 days) by 50-75 bps. Although the lender had kept its base rate unchanged at 9.75 percent, however, industry experts believe, the deposit rate hikes may be a prelude to the base rate hike.

"Market rates at the very short-end have gone up. But the impact on our total cost of funds is small, because our dependence on short-term and wholesale deposits is limited. Right now, it is too early to arrive at a conclusion (on increasing deposit and lending rates). We will watch the market," Chanda Kochhar, managing director and chief executive officer of ICICI Bank was quoted saying after the central bank's monetary policy review.

Three south-based lenders too raised its deposit and base rates. Privately sector lender Karnataka Bank had hiked its deposit rates 25-50 basis points across maturities. Earlier, the Hyderabad based Andhra Bank had increased its base rate by 25 bps to 10.25 percent. Karur Vysya Bank increased its base rate by 25 bps to 11 percent with effect from August 20, 2013.

Other private sector majors like HDFC Bank or Yes Bank, a relatively smaller player, too earlier had raised their term deposit rates by 25-225 basis points.

India's largest lender the State Bank of India (SBI) has not yet seen any significant rise in the cost of funds. The bank continues to rely on fixed deposits and savings deposits for funds. Those are cheap source of funds.

"Banks which borrow short but lend long term are at a disadvantageous position. Our cost has not gone up substantially,"  SBI Chairman Pratip Chaudhuri had told reporters after announcing the April-June quarter earnings.