The biggest trigger for interest rate hikes is the Inflation rate that has zoomed to a 13-year high of 11.05 per cent for the week ended June 7 this year. This is twice the RBI’s projected inflation rate of 5-5.5 per cent for 2008-09. Inflation has clearly moved into a dangerous zone, which will now push the interest rates higher. No wonder, bank deposit rates are expected to rise between 100 and 150 BPS by the end of 2008.
B. Sambamurthy, Chairman & Managing Director of Corporation Bank, says there is definitely a case for an increase in deposit rates over the short term. “But it’s difficult to predict the long-term interest rate scenario,” he adds. Following RBI’s move to hike repo rate by 25 basis points in June this year to 8 per cent, banks are now seriously considering revising their deposit rates upward by at least 25-50 basis points (BPS). For example, Vijaya Bank has increased its deposit rate by 30 BPS to 8.80 per cent for tenures of 1-2 years, while United Bank of India has raised its rates by 50 BPS to 8.5 per cent. The big boys of the banking sector, like the State Bank of India, which hiked rates by 25-50 BPS on June 1, and ICICI Bank are watching the situation ahead of RBI’s July monetary policy review.
Meanwhile, lending rates are already under pressure as a result of tightening liquidity and the increase in the repo rate. “The cost of funds (deposits) has a direct bearing on lending rates,” says a banker. The stage is, thus, set for an across-the-board hike in both the deposit and lending rates.