Bankers were taken by surprise by the timing and quantum of the Reserve Bank of India’s (RBI) 40 basis points (bps) repo rate hike on May 4. Veteran banker Uday Kotak called the RBI “courageous”.
“It was pretty clear that the wolf of inflation is getting more entrenched. There was a clear need to move. The RBI was courageous to do it in between policies and during market hours,” he said.
In a surprise move on Wednesday, May 4, the RBI increased the policy repo rate by 40 bps to 4.40 percent with immediate effect. Consequently, the standing facility rate stands adjusted to 4.15 per cent and the marginal standing facility rate and bank rate stands at 4.65 percent.
The central bank also hiked the cash reserve ratio (CRR) by 50 bps to 4.5 percent. This will lead to excess liquidity being pulled out of the system, bankers said.
As per South Indian Bank managing director and chief executive officer Murali Ramakrishnan, the hike in CRR will likely suck excess liquidity amounting to Rs 87,000 crore from the banking system.
“Forty basis points is only the reversal of the cut which was done by the central bank two years back. CRR increase by 0.5 percent is the measure to suck excess liquidity resulting in Rs 87,000 crore moving out of the system. Both these measures were expected and the RBI has chosen to do so now given the inflationary pressures,” Ramakrishnan told Moneycontrol.
Bankers say with easy money moving out of the system, banks will be forced to raise deposit rates to attract customers to reduce their dependence on capital markets.
Paul Thomas, MD & CEO, ESAF Small Finance Bank, said that by going in for the rate hike now, the RBI has simply followed the lead of other central banks. Prevailing global geopolitical tensions have led to a significant rise in commodity prices, leading to inflationary pressures across the globe, he said.
“In other words, lending will become costly for borrowers and this will indirectly affect investments. Banks may be forced to increase deposit rates to mobilise more deposits so that their dependence on borrowings may come down,” he added.
Puzzled by timing, quantum of rate cut
Umesh Revankar, MD & CEO, Shriram Transport Finance, said he expected the RBI to hike rates from the second half of the current fiscal year but it chose to do so in the first quarter itself.
“The timing and quantum of the RBI repo rate hike by 40 bps and hike CRR by 50 bps mid-cycle was a bit of surprise,” he said.
Revankar said he expects the borrowing cost to rise, but gradually. “Most of the borrowing for us is fixed in nature and hence the rate hike will not have an immediate impact on borrowing cost,” he said.
“I do not think a 40 bps rate hike will dampen demand. Most of the high-frequency indicators do indicate the Indian economy is gradually recovering and given the ongoing geopolitical situation, it was prudent to manage the evolving growth-inflation dynamics,” he added.
Behind the curve?
Some bankers say that globally central banks have been raising interest rates and the RBI would have been behind the curve had it not gone for a rate hike.
“The hike was expected by the market, otherwise the RBI may have been moving behind the curve. RBI will still ensure that there continues to remain enough liquidity in the market. Cost of funds for banks will go higher, thus lending rates will increase from here but possibly not too fast,” said Kunal Sodhani, assistant vice-president at Shinhan Bank (Global Trading Center, FX and Rates Treasury).
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